Tucows Inc. (NASDAQ:TCX) Q4 2024 Earnings Call Transcript

Tucows Inc. (NASDAQ:TCX) Q4 2024 Earnings Call Transcript February 13, 2025

Monica Webb: Welcome to Tucows’ fourth quarter 2024 management commentary. We have prerecorded prepared remarks regarding the quarter and outlook for the Company. A Tucows-generated transcript of 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 Tucows and Ting, followed by business remarks from Dave Woroch, CEO of Tucows Domains; Justin Reilly, CEO of Wavelo; Elliot Noss on Ting; Ivan Ivanov, Tucows’ CFO, who will discuss our financial results in detail, and finish with closing remarks from 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 Tucows’ management.

Please submit questions via email to ir@tucows.com until Thursday, February 20th. Management will either address your questions directly or provide a recorded audio response and transcript that will be posted to the Tucows website on Tuesday, March 4th, at approximately 5 PM Eastern time. We would also like to advise that, the updated Tucows Quarterly KPI Summary, which provides key metrics for all of our businesses for the last eight quarters, as well as for full years 2022, 2023 and 2024 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. Now for management’s prepared remarks. On Thursday, February 13th, Tucows issued a news release reporting its financial results for the fourth quarter and year ended December 31st, 2024.

That news release and the Company’s financial statements are available on the Company’s website at tucows.com under the Investors section. Please note, 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-K and 10-Q. The Company urges you to read its security filings for a full description of the risk factors applicable to its business. I would now like to turn the call over to Tucows President and Chief Executive Officer Elliot Noss. Go ahead, Elliot.

Elliot Noss: Thanks, Monica. We ended the year with strong momentum across all of our businesses. 2024 marked our fourth consecutive year of consolidated revenue growth, 19% year-over-year gross profit expansion, and more than doubling our annual Adjusted EBITDA to a touch under $35 million. Excluding Ting, we had Adjusted EBITDA of $57.4 million out the top end of our guidance. The $34.9 million in EBITDA, represented a 126% increase from $15.5 million in 2023. Most importantly, we have moved Ting to a sustainable cost structure, which generated slightly positive Adjusted EBITDA for the month of December. We repaid a further $2.0 million on the balance of the syndicated bank loan in Q4, which takes us to $16.5 million paid down in 2024.

And as we do every year, we’ve authorized a buyback program for 2025 for up to $40 million in Tucows stock. A reminder that we do this whether or not we can foresee using it at the time we do the authorization. I’ll now turn over to Dave Woroch, CEO of Tucows Domains.

Q&A Session

David Woroch: Thanks, Elliot. As we close out the year, I’m pleased to report that, Tucows Domains grew revenue, gross margin and Adjusted EBITDA, in each successive quarter of 2024. This follows a similar performance in 2023. February also marks the 25th anniversary of Tucows’ Domains business, from our launch of OpenSRS in early 2000. Today our core business remains strong and resilient, built over many years and with a long-term strategic view. From the beginning, we prioritized strong customer relationships and disciplined cost management to drive sustainable profitability. We’re now building on that solid oundation, and taking the greatest assets that this business has, its subject matter expertise and massive distribution channel and creating exciting future paths for growth.

Now turning to the recent quarter, revenue for Domain Services for Q4 was $65.7 million, up 6% from $61.8 million for the same quarter last year, and up 5% for the full year 2024 compared to 2023. Gross margin was $20.3 million in Q4, up 8% from the same quarter last year, and up 7% for the full year. And Domain Services’ Adjusted EBITDA was $11.6 million in the fourth quarter, up 8% from Q4 of last year, and up 4% for the full year. Our domains under management held steady, and were flat both year-over-year and quarter-over-quarter, while transactions were down just under 1% from Q4 of 2023. Both measures represent solid performance within our industry. And as I’ve said before, domain registration is a mature business, and revenue growth for us is going to come from adjacent revenue opportunities, like our registry services business, as well as new products we’re bringing to market.

Looking at the results from the segments of our business; in our Wholesale channel, revenue for Q4 was $56 million, up 7% compared to $52.5 million for Q4 of last year, and gross margin was $15 million, up 10% from $13.6 million from Q4 of 2023. Within the Wholesale channel, Domain Services’ gross margin in Q4 of this year was unchanged from last year at $9.9 million. Value-Added Services’ gross margin for Q4 of this year was up 36% year-over-year to $5 million, with the increase driven primarily by strong, non-recurring sales from our expiry stream and to a lesser extent from our hosted email service. In our Retail channel, revenue for Q4 was $9.6 million, up 3% from $9.3 million in Q4 of last year. Retail gross margin for the fourth quarter was also up 3% year-over-year.

Our combined overall renewal rate, at 76%, in both Q4 and for the full year, across all Tucows Domains brands, remains within our historical range and above the industry average. Our results for Q4 and the full year 2024 show a healthy core business in a mature industry. We’ll continue to focus on running that business efficiently. Further to the growth opportunities, earlier this year, in partnership with Amazon’s AWS business, we previewed a cloud-based hosting solution, designed to meet the needs of the thousands of smaller resellers within our distribution channel. This solution enables digital agencies, web designers and developers, and smaller hosting providers, to leverage cloud-based hosting without developing and building out the integration to AWS themselves.

And it reduces the barriers to entry in the same way that the OpenSRS platform–25 years ago enabled ISPs and web hosts to register domains for their customers without becoming an accredited registrar. Building on our ongoing success in registry services, we continue to leverage the technology acquired through the UNR acquisition to grow customers and revenue. As a testament to our capabilities, Tucows Domains was recently selected to be the technical services provider for the .IN country code domain, operated by the National Internet Exchange of India. Our teams are closely collaborating and we are establishing a dedicated team in India to support this initiative. As the project progresses, we anticipate migrating approximately 4 million domains onto our platform later this year, expanding our market presence and leadership in registry services.

The pricing and margin contribution for this piece of business is typical of a large, high volume customer. Reflecting on the past 25 years of Tucows Domains, we’ve achieved many milestones and built a healthy business. I’m proud of how our core business continues to reliably perform. Looking ahead, our focus on new growth initiatives is what excites us most. As the digital landscape evolves, we’re where we have always been, at the forefront and ready to deliver solutions for the future of the internet. In the coming quarters I will share further updates as we progress, but I do note that the growth trajectory does not mean there will be meaningful updates each quarter. Selling through channels is a slow build at the beginning as product and marketing are perfected.

We know good things take time, and we’re in this for the long haul: steady, strategic, and building for what’s next. Now, over to Justin Reilly, CEO of Wavelo.

Justin Reilly: Thanks, Dave. As I reflect on Wavelo’s third year as an independent business, I’m pleased with our achievements. Fiscal 2024 marks our best year yet across all key performance indicators. Wavelo grew revenue, gross margin, Adjusted EBITDA and new customer logos, all while renewing its inaugural customer in Echostar’s Boost Mobile. As we look at the market, only 2% of all B2B SaaS companies ever reach this level of ARR, while delivering positive EBITDA and cash flow. And we’re just getting started. Revenue for the full year 2024 was $39.9 million, up from $38.7 million in 2023. Gross margin was $38.6 million, up from $36 million last year. Adjusted EBITDA was $13.8 million, well outperforming our guidance of $8 to $10 million, and up from $10.6 million last year.

Our performance in 2024 tells a story of a business that is learning to nicely balance growth and profitability, while delivering for its existing customers. The latter is no more apparent than our four-year renewal of Wavelo’s partnership with Echostar’s Boost Mobile. As the Boost team moves from defense to offense, with the momentum of recently being awarded the best network in New York City, they looked no further than our event-driven platform to fuel their growth strategy. We couldn’t be happier to support their journey as America’s fourth carrier. In the quarter, Wavelo’s revenues were $9.9 million, down 1.9% from Q3 and up 3.6% from Q4 2023. Gross margin was $9.4 million, down 6.5% from Q3 and up 1.7% year-over-year. Adjusted EBITDA for Q4 was $3.7 million, up 7.3% from Q3 and up 41.3% year-over-year.

The trend-line quarter-over-quarter represents some lumpinesses in recognition of bundled professional services that happens annually in Q3, on boarding and cloud costs for new logos won earlier in the year, and an increased investment in our go-to-market teams. We’ll continue to invest in sales and marketing into 2025, doing so as always, in a measured, thoughtful manner. On the year, we’ve added three new customers to the Wavelo family. These are a mix of ISPs and MVNOs who share our contempt for telecom inefficiency and dream of a customer-first catalyst for their businesses. Our latest new logo, an innovative MVNO launching later this year, chose us because, in their own words, “Wavelo is great at doing impossible things”. With our internet roots, these things are simply “first principles” approaches to solving hard problems, but in telecom, they feel like magic.

It is in the issue we take with telecom inefficiency and our focus on customer obsession that we win. I am pleased with the progress our go-to-market teams have made this year. Specifically in the quarter, we’ve seen more tier one and tier two interest than in any other quarter in Wavelo’s history. Our teams are being considered for RFI and RFP procurement cycles, often without outbound sales activity. We are experiencing more organic inbound traffic and referrals than ever before. All of these are important, as our sales team focuses their effort up market and navigates the subsequent deal complexity that’s all too common in larger telecom prospects. I’ll remind investors that these are the places where we can facilitate the most change for telecom customers, as the inefficiencies are frankly hard to even quantify.

I will also remind investors that this is why I came to Tucows from Verizon in the first place. As we look to 2025, we enter the year with a mostly hired go-to-market team that is on boarded and hitting the ground running. We expect to grow the top-line more than we did in 2024, through a mix of existing and new customer revenue. That said, I want to be clear that, we’ll be doing so with a small but mighty sales and marketing team that represents a much smaller spend as a percentage of revenue than our competitors. We expect to continue to invest there in service of new customer logos and so we are providing an Adjusted EBITDA guidance of $13 million. As I said in Q4 2023, SaaS companies are in the midst of a flight to quality. This is a multi-year journey for those that have been VC-backed over the last decade.

Fortunately for Wavelo, its roots are grounded in the soil of a Tucows tradition of cash generation and shareholder value. This is just another day on the farm. As we look to the macro in ’25, every industry will have to contend with the generational disruption of AI. At a global market size of $3.1 trillion, telecom is the leading candidate for a historical refactoring. The most valuable data on the planet is in what products and services customers use, what they pay for those services, and what behaviors might indicate that they are about to make a change to what they use or what they are willing to pay. In telecom, this data sits in systems that are three and four decades old. Built for a different time. And inelegantly reengineered for years on end.

Fortunately, Wavelo was built for today and tomorrow. Simply running a business on an event-driven platform resets a telecom’s value trajectory in this new era. If AI is a rocket, then Wavelo is the jet fuel for an AI future. Thanks for listening, and now over to Elliot.

Elliot Noss: Thanks, Justin. As we close out 2024, Ting’s long term shape has settled. We are an ISP. In Q4, Ting reported $15.7 million in revenue, a 14% increase year over year. The growth was driven by a 17% year-over-year increase in subscribers, taking us to 50,700 subscribers from 43,400 in Q4 of last year. We had 10% year-over-year growth in completed serviceable addresses in 2024, taking us to 133,500 serviceable addresses for Ting-owned infrastructure. We remind that this will settle into a final count between 135,000 and 140,000 as we no longer engage in new construction. We’re pleased to see partner markets ramp with a 53% increase in addresses year-over-year. This brings us to 178,800 total serviceable addresses across all Ting footprints.

These numbers will grow as Memphis and Colorado Springs start to accelerate. Ting Gross Margin increased 40% year over year to $11.0 million in Q4, as we gained efficiencies from no longer carrying excess construction capacity. Ting’s Adjusted EBITDA continues to trend in a positive direction with a loss of only $1.5 million in Q4 down from $12.3 million in Q4 of 2023. Notably for the month of December, Ting had slightly positive Adjusted EBITDA and we expect that to continue. In 2024 we had a second failed common equity process, we went through two RIFs, and stopped building fiber to new organic homes. No longer carrying excess construction capacity has both greatly reduced the operating loss and greatly improved the gross margin as fallow capacity would be charged to COGS.

The natural loading of the networks has continued to increase customers, revenue and margin at strong levels. The work from here is to focus on penetration and then, mostly starting later this year, ARPU. We are in the process of rebuilding the marketing function–which is probably the function that can most benefit from AI augmentation. We have insourced the door-to-door function and have creative ideas on how to modernize an age-old practice. We have talked for years about the separation between capital, construction and ISP. We can see in all of the market evolution of the last few years that this is the way the market is evolving. We are keenly aware of the debt load on Ting and, while it is bankruptcy-remote from the rest of TCX, that does not lessen the urgency with which we look at it.

Loading the network and increasing ARPU are the most important operating variables and we continue to expect 2025 to be a year with a lot of change in the fiber space. And change can create opportunities. Now we’ll hear from our CFO, Ivan Ivanov, who will discuss our financial results in detail.

Ivan Ivanov: Thank you Elliot, and thank you everyone for joining us today. As we close out the fourth quarter, our focus remains on growth, efficiency, and financial discipline. The progress we’ve made is reflected in our strong top-line performance and a significant increase in Adjusted EBITDA. Our efforts, particularly in capital efficiency at Ting and the continued momentum in Tucows Domains and Wavelo, are driving meaningful results. In Q4, we delivered $93.1 million in total revenue, a 7.1% increase year over year. Gross profit was up 19% to $21.2 million, as we maintained disciplined cost controls. Adjusted EBITDA grew 403% to $12.8 million, a combination of both our revenue growth and operational improvements. At the net income level, we reported a net loss of $45.3 million, primarily due to a one-time impairment and restructuring charge of $28.2 million related to Ting’s capital efficiency plan, as well as other impairment and transition costs of $1.3 million.

When adjusting for these one-time charges, our net loss was $15.8 million, with an Adjusted EPS loss of $1.43 per share. Each of our business units played a role in delivering this quarter’s results, and I want to walk you through their individual performances. Starting with Tucows Domains; Domains continues to be a core driver of our financial strength. Revenue grew 6.2% year-over-year to $65.7 million, driven by expiry sales and continued strength in the core business. Gross margin expanded 7.9% to $20.3 million, holding steady at a 31% margin as a percent of revenues. And finally, Adjusted EBITDA increased 7.8% to $11.6 million for the quarter. Domains remains a highly reliable business, with strong cash generation and consistent performance.

Ting has been a major focus area, and we’re seeing the results of our efforts to optimize capital efficiency while continuing to scale in our existing footprint as well as partner markets. Revenue grew 14% year over year to $15.7 million. Subscribers grew 17% year over year, as we expanded in both existing and new partner markets. Ting’s gross margin climbed 40% to $11.0 million, with an improvement in gross margin percentage from 57% to 70% this quarter. And finally, Adjusted EBITDA improved significantly, moving from a $12.4 million loss last year to a $1.5 million loss this quarter. The growth in Adjusted EBITDA at Ting is a direct result of our disciplined approach to managing costs, streamlining operations, and maintaining ARPU stability.

These are structural improvements that set the stage for continued margin expansion. Moving on to Wavelo. Wavelo continues to deliver results as it focuses on building its growth funnel. Revenue increased 3.6% to $9.9 million. Gross margin held strong at 95% of revenues, and Adjusted EBITDA grew 41% to $3.7 million, highlighting our continued focus on efficiency and high-margin services. Corporate revenue remained steady at $1.8 million, and Adjusted EBITDA declined to negative $1.1 million for the quarter. Beyond our individual business units, we’re seeing positive trends this quarter in our cash flow and balance sheet. We recorded $11.7 million in investing activities related to PP&E, primarily due to cash payments for 3Q capital expenditures, which were incurred prior to the announcement of the Ting capital efficiency plan.

Adjusting for these payments for 3Q expenditures, our actual PP&E additions for the quarter were $4.8 million, which better represents our ongoing quarterly capital expenditures post Ting capital efficiency. We ended the quarter with $56.9 million in cash and cash equivalents. And on a net basis, our syndicated debt stands at $192.5 million, resulting in a leverage ratio of 3.26x. Please note that this syndicated net debt excludes Ting’s ABS notes and redeemable preferred units which are reported separately on our Balance Sheet. Interest expense on our syndicated loan was $3.9 million, down from $5.0 million a year ago, as we repaid $16.5 million in principal throughout the year. A major initiative this quarter was capital efficiency at Ting, which resulted in a $28.2 million one-time restructuring and impairment charge.

This charge primarily reflects adjustments to property, equipment, and capital inventory, aligning our investments with long-term operational needs. Excluding these one-time charges, total consolidated recurring operating and network expenses declined by $8.5 million or 22% year-over-year, and $6.8 million or 18% sequentially from Q3. These reductions are part of our effort to maintain financial discipline while supporting sustainable growth. As we enter 2025, our business fundamentals remain solid, and we are executing on our key priorities. We will continue focusing on optimizing operations, maximizing margin, and deleveraging to best deliver long-term shareholder value. With that, thank you and I will pass it back to Elliot.

Elliot Noss: Thanks Ivan. First, Adjusted EBITDA guidance for TCX for 2025. The consolidated guidance range is in and around $56 million, up 75% over 2024, before a one-time $9 million charge in our Corporate segment, as we wind down our Verizon MVNO agreement or $46 million after that charge. This breaks down as $44 million for Tucows Domains; $13 million for Wavelo; breakeven for Ting; and a $1 million loss for the Corporate segment. The Verizon charge would take the Corporate segment to a $10 million loss. Reminder that, this loss was priced into the 2020 deal with DISH and bundling mobile with our Ting fiber offering is the single biggest marketing tool for Ting in 2025. This “loss” in quotes will be very useful for Ting’s customer acquisition.

With Tucows Domains, we will have headwinds in general google search trends; the impact of an acquisition of a customer in 2023; and needing to front load some spend against some of the registry wins that will manifest in the later part of the year. As usual, this resilient business will grow past its challenges. Wavelo crushed its guidance in 2024 and will be around the same level in 2025, as it brought some of its operating efficiencies forward and will have a full go-to-market team for 2025. Ting will improve from a $22 million EBITDA loss to break even. 2025 is a big year for TCX. The 30th anniversary of Tucows, the 25th anniversary of OpenSRS and the 10th anniversary of Ting. With these milestones, ones that few businesses ever reach, I wanted to look at both capital markets and technology with a longer lens.

When I look at capital flows in the world in 2025 I see a continued flight to minimize risk. In the ABS market we see increasing demand, tightening spreads and more private capital entering in addition to the usual insurers and alike. In fiber and in enterprise software we see a continued lack of common equity cheques being written and we see lots of companies with private equity sponsors coming to the end of their last rounds without a clear path forward in sight. We see this trend manifest in the massive cash pile currently sitting at Berkshire Hathaway. Our investors know clearly what that signals about Warren Buffet’s thinking. And going one layer underneath that is, to my eyes, a recognition that the Magnificent 7 stocks those responsible for the vast majority of the major indexes’ returns in the past few years have now fundamentally shifted from being capital-light cash generators to spending a massive percentage of all cash generated on infrastructure in order to keep up with the AI arms race.

These companies now have the free cash flow characteristics of industrials, not tech companies. This all greatly reinforces the difficulty in finding reasonable returns at a reasonable level of risk. Of course this means an inevitable flight to value as capital needs a home. We are also obviously in the early innings of the biggest technological change since the dawn of the modern Internet. The impact of AI will dwarf the impact of trends like cloud and crypto. And it is important for investors to understand how we think about the change it will bring. First, in the near term, we are firmly in the camp of augmentation, not replacement. We are leaning hard into a number of projects across all of our businesses that are intended to make business processes more efficient and allow us to accelerate our productivity.

This also has the secondary impact of helping our people skill up and experience what is possible. In the longer term, we see agents serving nearly every individual in a number of capacities, further manifesting the promise of the early Internet, putting much more power into the hands of individuals at a time when the power of large businesses feels more and more pervasive. We think this mirrors the use of tools like email and websites at the dawn of the Internet, which means an important place in this future for service providers. At Tucows Domains we can empower the largest channel of service providers in the world to help their customers. At Wavelo we can help telecoms help their customers in ways that start to mirror the great experiences smaller providers deliver.

And at Ting we can experiment at an early stage with all of this, hacking a trail for the other two businesses to follow. You will not see this manifest in 2025 unless you squint really hard. But we know the mountain in the distance we are marching towards. In the interim, all three of our businesses have no existential hurdles with the Echostar renewal and the Ting restructuring behind us. We are heads down executing, generating cash, reducing debt and reducing our float where appropriate. 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@tucows.com by February 20th, and look for our recorded Q&A audio response and transcript to this call to be posted to the Tucows website on Tuesday, March 4th, at approximately 5 PM Eastern time.

Thank you.

End of Q&A: