Ting Before Earnings Release on 02-11-2015

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Tucows Inc. is an Internet services and telecommunications company, headquartered in Toronto, Ontario. The company is one of the largest domain registrars and operates Hover, a webhosting service, and OpenSRS, a platform for domain resellers. The company was formed in Flint, Michigan, in 1993. The Tucows logo is two cow heads, a play on the homophone "two cows." This web site is not affiliated in any way with Tucows. This web site is operated by a private investor who owns stock in Tucows and is interested in following the company. Nothing in this report is to be taken as a recommendation to buy or to sell stock in Tucows.
In 2012, Tucows launched Ting, a mobile virtual network operator (MVNO). Ting provides its own customer service, billing support systems, marketing, and sales personnel. This web site is not affiliated in any way with Tucows. This web site is operated by a private investor who who owns stock in Tucows and is interested in following the company. Nothing in this report is to be taken as a recommendation to buy or to sell stock in Tucows.
An MVNO is a wireless communications services provider that does not own the wireless network infrastructure over which the MVNO provides services to its customers but enters into a business agreement with a mobile network operator to obtain bulk access to network services at wholesale rates, then sets retail prices independently. In Tucows case, the wireless service provider is Sprint. While Sprint provides the wireless network, Ting provides its own customer service, billing support systems, marketing, and sales personnel. This web site is not affiliated in any way with Tucows. This web site is operated by a private investor who who owns stock in Tucows and is interested in following the company. Nothing in this report is to be taken as a recommendation to buy or to sell stock in Tucows.

A Financial Model of Ting

by Hugh Pickens, November 2014

I am long term investor who owns stock in Tucows. The purpose of this web site is to monitor the company. I compile information about Tucows from new releases, earnings reports, earnings conferences calls, press releases, and independent reporting on Tucows and Ting. I have built a financial earnings model to monitor Ting's past performance and to make predictions on how Ting will perform in the future.

Contents

Overview of Tucows and Ting

Five year chart for TCX ending on November 28, 2014. In February, 2012, Tucows launched Ting, a mobile virtual network operator (MVNO). Ting's launch coincided with a rise in Tucows (TCX) stock price. Tucows' stock price has quintupled since the launch of Ting. Click on the graphic to expand it. This web site is not affiliated in any way with Tucows. This web site is operated by a private investor who owns stock in Tucows and is interested in following the company. Nothing in this report is to be taken as a recommendation to buy or to sell stock in Tucows.
The incremental earnings from Tucows domain name business over the last seven quarters.
The incremental earnings from Tucows MVNO business over the last seven quarters.
Under our financial model, the combined incremental quarterly earnings from Tucows domain name business (Blue) and Tucows Ting Business Segment (Red) is projected to double over the next eight quarters. Maintaining the same Forward PE would give Tucows a price target of about $36 per share by the third quarter of 2016. Click on the graphic to expand.

A Financial Model of Ting

by Hugh Pickens, November 2014

The purpose of this web site is to provide a comprehensive overview of Tucows (TCX) that documents and explains the company's business strategy and monitors the execution of that strategy with particular emphasis on Tucows' MVNO, Ting. Information about Tucows is compiled here from news releases, earnings reports, earnings conferences calls, and independent reporting on Tucows and Ting.

A financial model shows Ting's past performance and predicts how Ting will perform in the future under different growth scenarios.

Contents of This Report

Executive Summary

  • Tucows (TCX) stock price has quintupled since launching Ting in 2012.
  • Ting is a high growth business segment of Tucows.
  • Up until the 4th quarter of 2014 Ting has contributed modestly to Tucows' bottom line.
  • A financial model of Ting's past growth predicts that Ting will soon overtake domain services to become the prime driver for Tucows' future growth.

Original Article

The original article is available at: Ting Model

Purpose of This Report

The purpose of this report is to:

  • Explain the rise in Tucows stock price and Ting's contribution to the increase
  • Model the contribution that Ting makes to Tucows bottom line
  • Predict what Ting's future contribution will be under different growth scenarios and what the effect may be on Tucows' stock price

Disclaimer

I am long term investor who owns stock in Tucows. The purpose of this web site is to monitor Tucows so I can understand how my investment is performing. I compile information about Tucows from new releases, earnings reports, earnings conferences calls, press releases, and independent reporting on Tucows and Ting. I have built a financial earnings model to monitor Ting's past performance and to make predictions on how Ting will perform in the future under different growth scenarios. One of that attractions of reporting on Tucows is that Ting's business strategy is relatively straightforward and easy to model with a limited number of inputs. For another example of a company I own stock in and follow closely, go to my report on Phillips 66 (PSX), a much larger and more complex company.

There are three reasons I am making this information available publicly. First, I find I am more careful in my work and systematic in my approach to stock valuations when I know other people are looking at my work. Second, I would like readers of this article to send their comments, appraisals, and criticisms of my work to hughpickens at gmaildotcom so I can incorporate their ideas into my approach and improve my financial model. Third, Tucows is a small cap with a market cap of just over $200 million that is thinly traded and only being followed by three analysts. I would like the stock to become better known because I think Tucows' value will rise in a more efficient and liquid market.

This web site is not affiliated in any way with Tucows. This web site is operated by a private investor who owns stock in the company and uses this web site to follow the company. All information on this web site comes from publicly available sources. Nothing in this report is to be taken as a recommendation to buy or to sell stock in Tucows.

Tucows Business Analysis

Background

Tucows Inc. is an Internet services and telecommunications company, headquartered in Toronto, Ontario. The company is one of the largest domain registrars and operates Hover, a webhosting service, and OpenSRS, a platform for domain resellers. The company was formed in Flint, Michigan, in 1993. The Tucows logo is two cow heads, a play on the homophone "two cows."

In February 2012, Tucows launched Ting, a mobile virtual network operator (MVNO). An MVNO is a wireless communications services provider that does not own the wireless network infrastructure over which the MVNO provides services to its customers. The MVNO enters into a business agreement with a mobile network operator to obtain bulk access to network services at wholesale rates, then sets retail prices independently. In Tucows case, the wireless service provider is Sprint. While Sprint provides the wireless network, Ting provides customer service, billing support systems, marketing, and sales personnel. Consumer Reports reported in November, 2014 that Ting is the highest rated small mobile service provider with the best customer service of any MVNO. According to Glenn Derene, the Electronics Editor for Consumer Reports, “Smaller providers like Ting, Consumer Cellular, and Republic have excellent satisfaction ratings because they’re designing innovative strategies to keep plan costs down for their customers and simplify their service options.”[1]

Ting's launch coincided with a rise in Tucows (TCX) stock price and since Ting's launch, Tucows (TCX) stock price has more than quintupled.

Tucows Two Business Segments

The most important single fact about Tucows is that the company operates two different business segments:

  • A predictable, steady domain registrar business (Tucows is the third largest ICANN-accredited registrar in the world and the company is the largest publicly traded registrar) and
  • A high growth mobile telco business that is attempting to disrupt a huge industry with large, entrenched incumbents.

The first business is as a wholesale reseller of domain names with over 8 million domain names under management. The domain service business segment of Tucows has a large volume but modest profit margins. The domain name business is a mature business with low margins, large cash flow, steady profits and slow growth.. The business is extraordinarily "sticky." Once someone buys a domain name from the retail side of Tucows or from one of Tucows' resellers, they almost never change providers because it is a lot of trouble to transfer a domain name to a new domain name company.

The MVNO side of the business is very different from the domain name side. The MVNO business generates high profits with gross margins of 45 percent. The MVNO business is also high growth with a customer base that increases by 10 to 15 percent every quarter. Although Tucows MVNO business is only in their third year of operation, it is already a significant contributor to the company's bottom line. There are many competitors but there is no single company dominates the MVNO business space. MVNOs are experimenting to find the best way to target customers, advertise their plans, acquire new business, provide customer service, and bill customers to become a profitable enterprise.

One thing that Ting has in common with Tucows' domain services business segment is that both segments provide world class telephone based customer service. Tucows has been able to transfer their experience in telephone based customer service from the domain name business segment to their MVNO business where customer service has become Tucows' prime differentiator from its competitors.

Consumer Reports reported in November, 2014 that Ting is the best small mobile service provider with the best customer service of any MVNO. According to Glenn Derene, the Electronics Editor for Consumer Reports, “Smaller providers like Ting, Consumer Cellular, and Republic have excellent satisfaction ratings because they’re designing innovative strategies to keep plan costs down for their customers and simplify their service options.”[2]

Incremental Contributions for Tucows Domain Services and Ting

The following is historical data taken from Tucows' last seven quarters showing the incremental contributions from Tucows' Domain Services and Ting:[3][4][5][6]

' 2013: Q1 2013: Q2 2013: Q3 2013:Q4 2014: Q1 2014: Q2 2014: Q3
Net Revenue All Domain Services $27,637,000 $27,439,000 $30,919,000 $33,139,000 $27,690,000 $27,328,000 $29,125,000
Cost of Revenue All Domain Services $19,968,000 $20,068,000 $20,672,000 $24,901,000 $20,035,000 $19,696,000 $20,192,000
Incremental Contribution fom Tucows Domain Services (Before Taxes and Other Expenses) $7,669,000 $7,371,000 $10,247,000 $8,238,000 $7,655,000 $7,632,000 $8,933,000
Net Revenue Ting $2,348,000 $3,734,000 $4,718,000 unavailable $6,712,000 $8,260,000 $9,749,000
Cost of Revenue Ting $2,110,000 $2,940,000 $3,597,000 unavailable $4,281,000 $5,040,000 $5,794,000
Incremental Contribution from Ting (Before Taxes and Other Expenses) $238,000 $794,000 $1,121,000 unavailable $2,431,000 $3,220,000 $3,955,000
Incremental Contribution from Ting and Domain Services $7,907,000 $8,165,000 $11,368,000 $8,238,000 $10,086,000 $10,852,000 $12,888,000

Notes

Note 1: Incremental earnings reflect the contribution of the business segment before taxes and other expenses.

Note 2: Information on the Net Revenue from Ting, Cost of Revenue from Ting, and the Incremental Contribution from Ting (Before Taxes and Other Expenses) for the third quarter of 2013 is unavailable.

Tucows Foreign Exchange Strategy

Five Year Chart of Canadian Dollars/ US Dollars. Up until the end of 2014 the Canadian Dollar was strong against the US Dollar so the company engaged in foreign exchange hedging to provide certainty around future costs. Tucows CEO Elliot Noss said on November 20, 2014 during the 2014 Q3 conference call that with the strengthening of the US Dollar, Tucows foreign exchange strategy will change and Tucows will go unhedged starting in 2015 to take advantage of the favorable exchange rates. "If the foreign exchange rate stays more or less in its current range, EBITDA could benefit by as much as $1 million to $1.5 million in 2015 relative to this year," said Noss.

Tucows is a Canadian company that generates most of their revenue in U.S. dollars, while most of their operating expenses including labor costs, rent, and utilities are in Canadian dollars. Up until the end of 2014 the Canadian Dollar was strong against the US Dollar so the company engaged in foreign exchange hedging to provide certainty around future costs. Tucows CEO Elliot Noss said on November 20, 2014 during the 2014 Q3 conference call that with the strengthening of the US Dollar, Tucows foreign exchange strategy will change and Tucows will go unhedged starting in 2015 to take advantage of the favorable exchange rates. "The appreciation of the Canadian dollar has been a bit of a headwind really over the last decade or so, as our expenses were that much higher relative to our revenues. You see that reflective in our 2014 numbers and our guidance. However, with the recent weakening of the Canadian dollar, we now have a bit of a tailwind. We have typically hedged out 18 months or so, but are now only hedged through the end of 2014. Thus, if the foreign exchange rate stays more or less in its current range, EBITDA could benefit by as much as $1 million to $1.5 million in 2015 relative to this year."[7]

Max Lukenbach reported on January 18, 2015 in a comment to an article about Tucows in Seeking Alpha that since Noss' announcement, the Canadian Dollar has weakened further and that this will be even more beneficial for Tucows and could "add $2,000,000 to EBITDA" during 2015.[8]

Tony Redondo wrote in Exchange Rates' on January 3, 2015 that "the majority of analysts are predicting further US Dollar strength in 2015 on the back of the strong recovery in the US economy and the monetary tightening policy embarked upon by the US Federal Reserve.[9]

Ting Financial Model

Process for Modeling Ting's Financial Performance

The process used to model Ting's financial performance is:


Ting's Financial Characteristics

Following is the number of customer, devices, growth, average customer bill, gross margin, and churn for Ting over the past four quarters. All data is taken from Tucows' discussions of quarterly earnings. [10][11][12][13]

' 2013:Q4 2014: Q1 2014: Q2 2014: Q3
Number of Customers at End of This Quarter 48,000 61,000 73,000 82,000
New Customers Added During This Quarter Unknown 13,000 12,000 11,000
Number of Devices at End of This Quarter 74,000 94,000 112,000 130,000
New Devices Added During Quarter Unknown 18,000 20,000 18,000
Churn Rate 2.50% 2.50% 2.50% 2.50%
Churned Customers 1,200 1,525 1,825 2,050
Average Customer Phone Bill per Quarter $105 $105 $105 $105
Gross Margin 45% 45% 45% 45%
Acquisition Costs per New Customer $100 $100 $100 $100

Notes and Assumptions

Note 1: Ting started in February 2012. Thehe model goes back to Q3 in 2013. Prior to the earnings report Q3 in 2013 Tucows did not break out the number of customers or devices.[14]

Note 2: There is a discrepancy of 2,000 customers in the number of customers added for 2014:Q3 due to an new method that Ting used for counting customers. "This is the result of a one-time change in how we measure active accounts."[15]

Note 3: The number of churned customers is calculated by multiplying the churn rate (2.5%) times the number of customers at the end of the quarter. Noss said in the 2014:Q2 earnings conference that "It is also worth mentioning that after 30 days of service when customers tend to determine whether they are getting sufficient network coverage, our churn rate drops comfortably below 2% per month."


Significant Financial Factors Used to Construct a Financial Model for Ting

Since Tucows has only released financial information based on customers and not devices, I will drop the device information from my model leaving the following:

' 2013:Q4 2014: Q1 2014: Q2 2014: Q3
Number of Customers at End of This Quarter 48,000 61,000 73,000 82,000
New Customers Added During This Quarter 10,000 13,000 12,000 11,000
Churn Rate 2.50% 2.50% 2.50% 2.50%
Churned Customers 1,200 1,525 1,825 2,050
Average Customer Phone Bill per Quarter $105 $105 $105 $105
Gross Margin 45% 45% 45% 45%
Acquisition Costs per New Customer $100 $100 $100 $100

Notes

Note 1: The number of devices and customers added for the 4th quarter of 2013 was not disclosed by Tucows. In this spreadsheet and going forward I will assume 10,000 new customers were added during 2013:Q4 consistent with the customers added in the first quarter of 2014.


Profitability of Ting Through Present Quarter

' 2013:Q4 2014: Q1 2014: Q2 2014: Q3
Number of Customers at End of This Quarter 48,000 61,000 73,000 82,000
New Customers Added During This Quarter to Arrive at Total Customers 10,000 13,000 12,000 11,000
Churn Rate 2.50% 2.50% 2.50% 2.50%
Churned Customers 1,200 1,525 1,825 2,050
Average Customer Phone Bill per Quarter $105 $105 $105 $105
Gross Margin 45% 45% 45% 45%
Acquisition Costs per New Customer $100 $100 $100 $100
Gross Income in This Quarter $5,040,000 $5,642,438 $6,939,188 $8,134,875
Cost of Goods Sold in This Quarter $2,772,000 $3,103,341 $3,816,553 $4,474,181
Cost to Acquire New Customers $1,120,000 $1,452,500 $1,382,500 $1,305,000
Incremental Contribution from Ting (Before Taxes and Other Expenses) $1,148,000 $2,539,097 $3,122,634 $3,660,694
Incremental Contribution from Ting per Share (Before Taxes and Other Expenses) $0.10 $0.22 $0.28 $0.32

Notes

Note 1: The "Gross Income" is calculated by multiplying the "Average Customer Phone per Quarter" times the number of customers in the previous quarter plus one half the new customers gained minus one half the lost (chruned) in the present quarter. The factor of one-half is used because it is assumed that customers are added in a steady stream so that on average the new customers added will contribute to the gross income only one half of the quarter.

Note 2: The "Cost of Goods Sold" is calculated by taking the "Gross Income" and subtracting from it the "Gross Income" times the "Gross Margin".

Note 3: The "Cost to Acquire New Customers" is calculated by mulitplying the "New Customers Added During This Quarter to Arrive at Total Customers" plus the "Churned Customers" and multiplying this times the "Acquisition Costs per New Customer".

Note 4: The "Incremental Contribution from Ting (Before Taxes and Other Expenses)" is calculated from the "Gross Income in This Quarter" and subtracting both the "Cost of Goods Sold in This Quarter" and the "Cost to Acquire New Customers".

Note 5: The "Incremental Contribution from Ting (Before Taxes and Other Expenses)" does not include taxes and other expenses which are spread over both the domain services portion to Tucows and the Ting portion of Tucows. This will be factored in at the last step of the process.

Note 6: The "Incremental Contribution from Ting per Share (Before Taxes and Other Expenses)" is calculated by dividing the "Net Income for This Quarter (before Taxes and Other Expenses)" by the 11,321,175 outstanding shares of Tucows.


Profitability of Ting Through the Next Quarter

CEO Elliot Noss said during the third quarter conference call that he attributes the slowdown in addition of new customers in the third quarter to Apples announcement of the iPhone 6. Noss said that he expect the add 16,000 new customers in the fourth quarter. Under this assumption Ting's profitability is shown in the following chart:

' 2013:Q4 2014: Q1 2014: Q2 2014: Q3 2014: Q4
Number of Customers at End of This Quarter 48,000 61,000 73,000 82,000 98,000
New Customers Added During This Quarter to Arrive at Total Customers 10,000 13,000 12,000 11,000 16,000
Churn Rate 2.50% 2.50% 2.50% 2.50% 2.50%
Churned Customers 1,200 1,525 1,825 2,050 2,450
Average Customer Phone Bill per Quarter $105 $105 $105 $105 $105
Gross Margin 45% 45% 45% 45% 45%
Acquisition Costs per New Customer $100 $100 $100 $100 $100
Gross Income in This Quarter $5,040,000 $5,642,438 $6,939,188 $8,134,875 $9,321,375
Cost of Goods Sold in This Quarter $2,772,000 $3,103,341 $3,816,553 $4,474,181 $5,126,756
Cost to Acquire New Customers $1,120,000 $1,452,500 $1,382,500 $1,305,000 $1,845,000
Incremental Contribution from Ting (Before Taxes and Other Expenses) $1,148,000 $2,539,097 $3,122,634 $3,660,694 $4,194,619
Incremental Contribution from Ting per Share (Before Taxes and Other Expenses) $0.10 $0.22 $0.28 $0.32 $0.37

Notes

Note 1: Model assumes 16,000 new customers added in 4th quarter of 2014 per 3rd quarter conference call per remarks by Tucows CEO Elliot Noss during the 2014:Q3 earnings conference.


Profitability Through the Next Year: Constant Customer Add

Here is what the next year looks like using the assumption of 16,000 new customers per quarter.

' 2014: Q3 2014: Q4 2015:Q1 2015:Q2 2015: Q3
Number of Customers at End of This Quarter 82,000 98,000 114,000 130,000 146,000
New Customers Added During This Quarter to Arrive at Total Customers 11,000 16,000 16,000 16,000 16,000
Churn Rate 2.50% 2.50% 2.50% 2.50% 2.50%
Churned Customers 2,050 2,450 2,850 3,250 3,650
Average Customer Phone Bill per Quarter $105 $105 $105 $105 $105
Gross Margin 45% 45% 45% 45% 45%
Acquisition Costs per New Customer $100 $100 $100 $100 $100
Gross Income in This Quarter $8,134,875 $9,321,375 $10,980,375 $12,639,375 $14,298,375
Cost of Goods Sold in This Quarter $4,474,181 $5,126,756 $6,039,206 $6,951,656 $7,864,106
Cost to Acquire New Customers $1,305,000 $1,845,000 $1,885,000 $1,925,000 $1,965,000
Incremental Contribution from Ting (Before Taxes and Other Expenses) $3,660,694 $4,194,619 $4,941,169 $5,687,719 $6,434,269
Incremental Contribution from Ting per Share (Before Taxes and Other Expenses) $0.32 $0.37 $0.44 $0.50 $0.57

Notes

Note 1: The model looks at Ting earnings over the next year under the assumption that net customers increase by 16,000 per quarter.


Profitability of Ting Through the Next Year: Constant Growth Rate in Customer Base

This table shows the profitability of Ting using the assumption that Ting net customers increase by 16,000 customer in the 4th quarter of 2014 and by 18% for the following quarters.

' 2014: Q3 2014: Q4 2015:Q1 2015:Q2 2015: Q3
Number of Customers at End of This Quarter 82,000 98,000 115,640 136,455 161,017
New Customers Added During This Quarter to Arrive at Total Customers 11,000 16,000 17,640 20,815 24,562
Quarterly Growth Rate 13.41% 19.51% 18.00% 18.00% 18.00%
Churn Rate 2.50% 2.50% 2.50% 2.50% 2.50%
Churned Customers 2,050 2,450 2,891 3,411 4,025
Average Customer Phone Bill per Quarter $105 $105 $105 $105 $105
Gross Margin 45% 45% 45% 45% 45%
Acquisition Costs per New Customer $100 $100 $100 $100 $100
Gross Income in This Quarter $8,134,875 $9,321,375 $11,064,323 $13,055,901 $15,405,963
Cost of Goods Sold in This Quarter $4,474,181 $5,126,756 $6,085,377 $7,180,745 $8,473,279
Cost to Acquire New Customers $1,305,000 $1,600,000 $1,764,000 $2,081,520 $2,456,194
Incremental Contribution from Ting (Before Taxes and Other Expenses) $3,660,694 $4,194,619 $4,978,945 $5,875,155 $6,932,683
Incremental Contribution from Ting per Share (Before Taxes and Other Expenses) $0.32 $0.37 $0.44 $0.52 $0.61

Notes

Note 1: The model looks at Ting earnings over the next year under the assumption that net customers increase by 16,000 in the next quarter and by 18% for every quarter after that.


Overall Tucows Profitability

The final product of this exercise is to predict, as an investor, what Tucows net earnings will be in the future. The problem is that there are still a series of unknowns such as the cost of taxes and other expenses on Tucows' balance sheet, the profitability of the domain name part of Tucows' business, and the effect of currency exchange rates (Tucows in a Canadian company and pays most of their fixed costs in Canadian dollars). The approach that I am going to take is to calculate what Tucows overall profitability would be a year from now assuming that the domain services part of Tucows stays the same and that taxes and other expenses rise proportionally.

' 2014: Q3 2014: Q4 2015:Q1 2015:Q2 2015: Q3
Net Revenue All Domain Services $29,125,000 $29,125,000 $29,125,000 $29,125,000 $29,125,000
Cost of Revenue All Domain Services $20,192,000 $20,192,000 $20,192,000 $20,192,000 $20,192,000
Incremental Contribution fom Tucows Domain Services (Before Taxes and Other Expenses) $8,933,000 $8,933,000 $8,933,000 $8,933,000 $8,933,000
Net Revenue Ting $9,749,000 9,321,375 11,064,323 13,055,901 15,405,963
Cost of Revenue Ting $5,794,000 6,726,756 7,849,377 9,262,265 10,929,473
Incremental Contribution from Ting (Before Taxes and Other Expenses) $3,955,000 4,530,188 5,377,261 6,345,168 7,487,298
Incremental Contribution from Ting and Domain Services (Before Taxes and Other Expenses) $12,888,000 13,463,188 14,310,261 15,278,168 16,420,298
Tucows Net Income After Taxes and Other Expenses $2,690,905 2,810,686 2,987,528 3,189,597 3,428,037
Basic Earnings Per Common Share $0.24 $0.25 $0.26 $0.28 $0.30

Notes

Note 1: For purposes of calculation, it is assumed that the "Incremental Contribution fom Tucows Domain Services (Before Taxes and Other Expenses)" will remain the same for each quarter throughout the period.

Note 2: For purposes of calculation, it is assumed that the cost of taxes rises proportionally with revenue.

Note 3: For purposes of calculation, it is assumed that the cost of currency exchange rises proportionally with revenue.

Note 4: For purposes of calculation, it is assumed that the cost other expenses which include acquisition costs and customer service scale proportionally with revenue.

Note 5: The model looks at Ting earnings over the next year under the assumption that net customers increase by 16,000 in the next quarter and by 18% for every quarter after that.

Comparison With Other MVNOs

It is always useful to compare a company to another company in the same business space. Tucows is, to our knowledge, the only MVNO that is part of a publicly traded company for which subscriber information, acquisition costs, chrun, and gross margins are available. However, there are other MVNOs for which some subscriber information is available:

  • FreedomPop which is presently rumored to be talks with Sprint and other carriers about acquisition or investment
  • Virgin Mobile which was acquired by Sprint Nexus in 2009

FreedomPop

FreedomPop is a free wireless internet and mobile phone service provider based in Los Angeles, California. The company provides wireless data voice and text services for Clearwire and Sprint. FreedomPop sells mobile phones, tablets and broadband devices for use with their service. FreedomPop was co-founded by Stephen Stokols, CEO and Steven Sesar in 2011. Prior to founding FreedomPop, Stokols served as CEO of Woo Media, a video-chat and entertainment startup. FreedomPop partnered with Lightsquared in December 2011, but ended its partnership after Lightsquared did not receive Federal Communications Commission (FCC) approval to build out its network. FreedomPop began selling its first smartphones in October 2012. That month the company converted 5% of its free users to paid users. The following month, in November, the number of converted users increased to 10%. FreedomPop also began offering mobile and wireless internet services in the United States using Clearwire's 4G network. FreedomPop converted 20% of its free user base to paid users in December 2012.[16]

In April 2013, FreedomPop partnered with Sprint to expand its coverage to include 3G and 4G with Sprint compatible devices. In October 2013, one year from its initial wireless broadband launch, FreedomPop launched its beta free mobile phone plan that included voice, text, and data service. In November FreedomPop launched a bring your own device for Sprint-compatible phones.[17]

Sprint Acquisition of FreedomPop

Josh Ong reported on The Next Web on May 14, 2014 that FreedomPop was on track to hit 250,000 total subscribers. According to FreedomPop, over 60 percent of its phone customers stick to the free plan and don’t spend anything for service. This would mean that FreedomPop had 100,000 paying customers in May, 2014. According to Ong FreedomPop added 100,000 customers in the previous year. Using this figure and the 40% rate, this would mean that FreedomPop has about 120,000 paying customers at the time this comparison is being made in December, 2014.[18]

John Shinal reported in USA Today on November 12, 2014 that according to two sources Sprint was in talks with FreedomPop about a possible acquisition that could boost Sprint's revenue growth and lower its subscriber-acquisition costs. "The talks are fluid, meaning they could lead to an investment, an acquisition or no deal between the companies," writes Shinal. "Other suitors have emerged for FreedomPop, among them a large U.S. technology company and a smaller wireless carrier, according to the sources who are not authorized to speak publicly about the matter." According to Shinal an acquisition would likely value all of FreedomPop in a range between $250 million and $450 million, while an investment would value it closer to $200 million.[19]

Kevin Richard reported at GigaOm on November 12, 2014 that FreedomPop CEO Stephen Stokols said parts if not all of the report are false adding that while FreedomPop is in formal talks with “a few” companies about a potential acquisition, Sprint is not one of them. “We’ve gotten several inquiries on the M&A side, but nothing official from Sprint,” said Stokols.[20]

Valuation of FreedomPop

Dividing FreedomPop's paying customer base of 120,000 into the company's valuation range of $200 to $450 million, the value per customer is in the range of $1,660 to $3,750. Applying the same valuation per paying customer to Ting's 82,000 paying customers at the end of the third quarter in 2014 results in a valuation in the range from $136 to $307 million. Tucows domain services must be added for a total company valuation. Using Tucows stock price of $3.00 per share on December 30, 2011 before Ting was publicly announced times 11.3 million outstanding shares, provides a value of Tucows domain services of about $33 million. This gives Tucows a total valuation of between $170 and $341 million. Using the $18 stock price on December 1, 2014 times 11.3 million shares gives Tucows a market cap of $203 million putting The company at the low to mid range of its valuation if it were to become a target for acquisition.

Virgin Mobile

NBC News reported on July 28, 2009 that Sprint Nextel Corp. had made a $483 million deal to buy Virgin Mobile USA Inc. Sprint paid $5.50 in stock for each Virgin Mobile share. Sprint already owned 13.1 percent of Virgin Mobile, which uses Sprint's network to offer service. Virgin Mobile had 5.2 million subscribers who paid an average of $20 per month. Sprint has 49.1 million subscribers, including those using the network through wholesalers like Virgin Mobile.[21]

"This is a good transaction for Sprint, which already owns 13 percent of Virgin, because it provides 5 million customers which are already using its own network. This more than doubles the size of Sprint's prepaid business overnight and increases its distribution channels quickly for prepaid where it has had recent success with Boost Unlimited," wrote Walter Piecyk of Pali Research, noting that the transaction values each Virgin subscriber at $130, which the firm said is slightly above what it costs Virgin Mobile to acquire a customer.[22]

"We believe Virgin Mobile felt compelled to sell because its customer base was declining, the prepaid space is getting much more competitive and it faced a $100 million debt maturity at the end of next year that we do not believe it had enough free cash flow to pay-off," Piecyk wrote. "Virgin was selling an uncompetitive unlimited offering right next to Boost Unlimited in its own stores which we believe will either be terminated or brought to parity with Boost Unlimited. We think it's more likely that Virgin terminates its unlimited offerings and returns its focus to its legacy pay as you go model."[23]

Risk Factors

Tucows' Self Identified Risk Factors

Tucows identified the following risk factors in their 2013 Annual Report:[24]

  • Ting has a short operating history which may not be indicative of our future performance and, if our revenue and earnings growth are not sustainable, we may not be able to generate the earnings necessary to fund our operations or continue to grow our business.
  • Ting’s service offerings may not be successful in the long term.
  • Ting may face competitive pressure to reduce prices for our products and services, which may adversely affect our profitability and other financial results.
  • Competition in the wireless industry could adversely affect Ting’s revenues and profitability
  • The blurring of the traditional dividing lines among long distance, local, wireless, video and Internet services contributes to increased competition for Ting services.
  • Ting employs a postpaid business model which exposes us to increased credit risk
  • Ting may be limited in its ability to grow its business and customer base unless it can continue to obtain network capacity at favorable rates and meet the growing demands on its business systems and processes.
  • As an MVNO, Ting is dependent on Sprint for its wireless network and any disruptions to such network may adversely affect its business and financial results.
  • Ting competes with Sprint’s products

Ting MVNO Risks

Here are some of the risk factors that could affect the future profitability of Ting's MVNO:

  • Ting fails to meet predicted growth goals
  • Major problems with Sprint network cause customers to leave Ting
  • Sprint continues to lose money, is acquired, and Ting loses their MVNO arrangement with Sprint
  • Ting's customer service fails to scale as more users are added leading to customer dissatisfaction and higher churn rate
  • Ting's acquisition costs rise
  • Competitive threats from other MVNOs

Ting MVNO Risk Mitigation

Ting's announcement on December 10, 2014 that they will be partnering with a second network provider (rumored to be T-Mobile) to provide nationwide GSM coverage goes a long way towards mitigating Ting's most serious business risks from having Sprint as Ting's sole source of network coverage and the perception of Sprint's poor coverage in some geographic areas.

Ting ISP Risks

Tucows' announcement on December 15, 2014 that they are acquiring 70% ownership of an independent Internet service provider to provide high speed Internet access, Internet hosting and network consulting services to over 3,000 customers in Central Virginia brings a new set of risks to Tucows.[25]

  • This is a new line of business which is different from their domain services business segment and their MVNO business segment. There is no guarantee that the core competencies that have made Tucows successful will transfer over to the new line of business.
  • The new business line may divert resources from the other two business lines.
  • The new business line is very capital intensive as opposed to the two existing business segments which do not require massive capital expenditures.
  • High speed internet access is a very competitive business space with large entrenched competitors such as Google and Comcast.

Conclusions

Our financial model shows that Ting will become the prime driver for Tucows accelerated growth within a one to two year time frame.

Reference: Latest News about Tucows and Ting

February 11, 2015: Ting No Longer Has to Wait for iPhone 6/6 plus on Sprint Network

9to5mac reported on February 11, 2015 that sources say Sprint is dropping a requirement that made the mobile virtual network operators (MVNOs) using its network—such as Ting, FreedomPop, Straight Talk, Boost, and Virgin—wait a certain period of time, usually at least a year, before offering support for the latest devices. For Ting, the moves comes just as it’s about to land support for almost all devices anyway as it makes a deal with T-Mobile to offer support for GSM devices on its network. In the past, Ting required customers to bring a Sprint supported, CDMA device when signing up with its plans, but in the coming weeks the carrier will also support GSM devices through the new deal with T-Mobile.[26]

January 22, 2015: Ting Welcomes Google to the Fray

Andrew Moore-Crispin wrote on the Ting Blog of January 22, 2015 that Ting welcomes Google to the fray. "There are more than enough disenfranchised customers of the major carriers to go around. With three years in the game, we’re available to chat—to hangout, as it were—but it seems only fair that you buy whatever drinks will be had when we do." Moore-Crispin says that Google’s entry into the market will be the first a lot of people will hear about “MVNOs” as an alternative to the majors and just adds more legitimacy and helps to dispel the myth that MVNO customers get second-rate service. "We’ll out odds on our approach of putting customers in control of their devices and ultimately, their bills and of having real, human beings pick up the phone when it rings."[27]

January 21, 2015: Ting Announces Beginning of GSM Rollout

Tucows announced on January 21, 2015 that Ting is on track to launch Ting on a GSM network in late February and is slowly inviting people into the early beta phases. "Our first batch of X1 SIM cards has arrived in Starkville, Mississippi. We’ve been testing Ting service across a wide array of devices since early December."[28]

January 13, 2015: Ting to Be Network Operator of Internet Service to City-Owned Fiber Optic Network in Westminister, Maryland

The Whir reported that Tucows announced on January 13, 2015 that Ting has been selected to be the network operator of the city-owned fiber optic network in Westminister, Maryland that will initially reach around 9,000 homes and 500 businesses. “They believed that superfast Internet could bring and grow businesses, create jobs, increase property values and improve the quality of life for all residents,” said Ting VP of marketing Michael Goldstein. “They also realized that infrastructure that is crucial to the city, and likely will be for the next hundred years, should rightly be owned by the city.” “If a smaller, more customer-focused company player like Ting can pull off a win-win in a community like Charlottesville, it bodes really well for small towns and providers all over the country," said Ting senior content manager Andrew Moore-Crispin. "For the record, we’re confident we can pull off just that, otherwise we wouldn’t start down the path."[29]

January 8, 2015: Tucows Dutch Auction Ends with Purchase of 193,907 shares at $18.50

Tucows announced in a press release on January 8, 2015 that their modified “Dutch auction” tender offer had ended with the purchase 193,907 shares of its common stock at a purchase price of $18.50 per share, for a total cost of $3,587,280, excluding fees and expenses related to the tender offer. The 193,907 shares accepted for purchase in the tender offer represent approximately 1.7% of Tucows’ currently issued and outstanding common stock. Following the payment Tucows will have approximately 11,135,825 shares issued and outstanding.[30]

December 16, 2014: Ting Acquires Majority Stake In Blue Ridge InternetWorks, an Independent Internet Service Provider

Tucows issued a press release on December 15, 2014 reported that Ting Fiber, a wholly owned subsidiary of Tucows, has entered into a definitive agreement to acquire 70% ownership of an independent Internet service provider in Charlottesville, Virginia doing business primarily as Blue Ridge InternetWorks, a company that provides high speed Internet access, Internet hosting and network consulting services to over 3,000 customers in Central Virginia. “The expansion from mobile to fixed access is almost obvious for us,” says Tucows CEO Elliot Noss. “The only customers in the world more starved for great service and fair pricing than mobile phone customers are cable customers. They deserve that. But we have an opportunity with BRI in Charlottesville to offer even more than great service at a low price. The step up to gigabit, or ultra high-speed, access is profound.” The founders of the BRI Group will remain with the company. The price and terms of the acquisition were not announced. The acquisition is subject to regulatory approvals and other customary closing conditions and is expected to close during the first quarter of 2015. “For shareholders, this is a rare opportunity," concluded Noss. "In one deal, we get customers, revenue, prospects, infrastructure and a wealth of fiber expertise. We get an inside track on a game changing technology.”[31]

December 9, 2014: Fiercewireless Says Ting Will Be Adding T-Mobile Support in February 2015

Phil Goldstein reported at Fiercemobile that Ting Director Scott Allan told FierceWireless that he could not say which GSM carrier Ting is working with due to contractual obligation however, a coverage map Ting provided to FierceWireless mirrors the national coverage footprint of T-Mobile. Customers will be able to bring unlocked GSM phones to Ting and purchase a GSM SIM card to work with the phone. Ting's GSM SIM cards will cost $9 or less, according to Allan. Allan said Ting only began discussing adding a GSM partner within the last six months but that the move fits with what Ting offers to customers. "It aligns with our brand," he said. "We want consumers to have choices. And we want consumers to have freedom. And we want to provide innovative services. GSM really ticks all those boxes for us."[32]

December 9, 2014: Ting Will Support Latest Devices Including iPhone 6 in February 2015

The Ting Blog reported on December 9, 2014 that when Ting on GSM is live in February 2015, there will be no more waiting for the latest iPhone or Android device to be allowed on Ting. If it can be purchased unlocked, or if it can be carrier unlocked, it can come. What’s more, better than 80% of smartphones made in the last couple of years will be compatible with Ting. That will include the unlocked iPhone 6 or iPhone 6 Plus.[33]

December 9, 2014: Ting to Add Service on a GSM Network

Tucows announced on December 9, 2014 that Ting has an agreement with a major US network provider to offer service on a GSM network that is slated to go live in February 2015 and will operate in concert with the existing CDMA service. Once live, CDMA and GSM devices can coexist under a single Ting account, sharing a single pool of minutes, messages and megabytes of data. “This is an industry first,” said Elliot Noss, CEO of Tucows and Ting. “Our goal has always been a mobile market where customers and their devices can move between carriers as they see fit. We think the power balance in the mobile industry is all off. Customers, not service providers, should hold the cards.”[34]

December 8, 2014: Tucows Announces Dutch Auction Tender Offer

Tucows announced on December 8, 2014 that that it is commencing its "modified Dutch auction Tender Offer" (the "Tender Offer") to repurchase a number of its common stock not to exceed an aggregate purchase price of $8.0 million. Under the Tender Offer, shareholders will have the opportunity to tender some or all of their shares at a price within the range of $16.50 to $18.50 per share. Assuming that the offer is fully subscribed, if the Purchase Price is determined to be $16.50 per share, the minimum Purchase Price under the Tender Offer, the approximate number of shares that will be purchased under the offer is 484,848. Assuming that the Tender Offer is fully subscribed, if the Purchase Price is determined to be $18.50 per share, the maximum Purchase Price under the offer, the approximate number of shares that will be purchased under the offer is 432,432. Shareholders whose shares are purchased in the offer will be paid the determined purchase price per share net in cash, without interest, after the expiration of the offer period at 5:00 P.M., New York City Time, on Wednesday, January 7, 2015. [35]

November 20, 2014: Consumer Reports Rates Ting Highest Among Wireless Providers

Justin Diaz reported at Android Headlines on November 20, 2014 that as part of Consumer Reports annual cell-phone service comparison Ting came out on top as the best mobile wireless provider with a company rating of 91 out of 100 because of their excellent service and customer support. According to Glenn Derene, the Electronics Editor for Consumer Reports, “Smaller providers like Ting, Consumer Cellular, and Republic have excellent satisfaction ratings because they’re designing innovative strategies to keep plan costs down for their customers and simplify their service options.”[36]

“If you haven’t heard of the company before, there’s a reason for that: The service’s parent company, Tucows, is a domain name registrar and has made a business decision to not spend a lot on Ting-related advertising, instead choosing to offer lower-priced services. Considering they received the top spot on value, it appears they are performing well here."[37]

November 12, 2014: Tucows Announces Third Quarter Results

"In the third quarter we again saw the growing contribution from Ting in our financial results as our Domain Services businesses continued to deliver consistent, reliable performance," said Elliot Noss, President and Chief Executive Officer, Tucows Inc. "We achieved net earnings of $0.24 per share, bringing net earnings for the year-to-date to $0.40 per share, surpassing our total for the entire 2013 year. Consolidated gross margin increased to 26% from 21% a year earlier, excluding the Portfolio group, which benefited from atypical contributions in both quarters."[38]

Ting has 82,000 Customer at the End of Q3 and Added 11,000 New Customers This Quarter

"I want to note, that while we added 11,000 accounts in Q3 we are now counting our total of active accounts at just over 82,000, which is only 9,000 more than the 73,000 we reported last quarter," said Tucows CEO Eliot Noss. "This is the result of a one-time change in how we measure active accounts."[39]

"Ting continued its strong customer growth in the third quarter. We had a roughly 11,000 accounts and 17,000 devices, that represents a 15% increase in our customer base in the quarter, healthy growth for just about any business. But for Ting, it is in fact a bit of a slowdown," said Tucows CEO Eliot Noss. "Absolute net adds were slightly below both Q2 of this year and Q3 of last year. This is partly above the success of the iPhone 6 and 6 Plus launches during the quarter, devices we do not yet support on Ting. It is also partly about the climbing perception of the Sprint network relative to other major networks. And it also appears to be about aggressive new price promotions for major carriers to retain and acquire customers. Looking ahead, we believe each of these areas, device, network and price bring more opportunities for Ting growth than threats."[40]

Ting Has 130,000 Devices at the End of Q3 and Added 17,000 New Devices This Quarter

"As I last quarter I will quickly summarize the Ting business for easy modeling. We finished the quarter at 82,000 customers with 130,000 devices," said Tucows CEO Eliot Noss. "Customers are spending about $35 a month on their phone bills. Growth margins are 45% to 50%. We spent under $100 to acquire a customer. We are adding about 16,000 new customers on growth basis each quarter and continue to churn about 2.5% of our base each month."[41]

"Ting continued its strong customer growth in the third quarter. We had a roughly 11,000 accounts and 17,000 devices, that represents a 15% increase in our customer base in the quarter, healthy growth for just about any business. But for Ting, it is in fact a bit of a slowdown," said Tucows CEO Eliot Noss. "Absolute net adds were slightly below both Q2 of this year and Q3 of last year. This is partly above the success of the iPhone 6 and 6 Plus launches during the quarter, devices we do not yet support on Ting. It is also partly about the climbing perception of the Sprint network relative to other major networks. And it also appears to be about aggressive new price promotions for major carriers to retain and acquire customers. Looking ahead, we believe each of these areas, device, network and price bring more opportunities for Ting growth than threats."[42]

Customers Are Spending About $35 a Month on Their Phone Bills

"Customers are spending about $35 a month on their phone bills," said Tucows CEO Eliot Noss.[43]

Gross Margins are 45% to 50%

Gross margins are 45% to 50%," said Tucows CEO Eliot Noss.[44]

Customer Acquisition Costs are under $100

We spent under $100 to acquire a customer.

Ting Expects to Add 16,000 New Customer Per Quarter

We are adding about 16,000 new customers on growth basis each quarter and continue to churn between 2.0 and 2.5% of our base each month.

Average Ting Customer Saves $60 per Month

"A recent audit of the Ting base revealed that our average customer has saved $37.57 per device a month since switching, that’s an average of nearly $60 per account," said Tucows CEO Eliot Noss. "Meanwhile McKinsey just completed an annual survey, revealing that for the second year in a row price is the number one consideration for customers changing mobile providers and the percentage for whom that is true has grown considerably."[45]

Ting is No Longer Appealing to Just Early Adapters

"For the past couple of years, we’ve been fighting for our share of a small population of early adopters that are just satisfied and venturous enough to look beyond the major carriers for savings," said Tucows CEO Eliot Noss. "We believe the most important trend over the next year, will be more and more people joining that population recognizing that they can be paying less, looking beyond the four major carriers and discovering services like ours."[46]

Survey Shows Price Is The Number One Consideration For Customers Changing Mobile Providers

Meanwhile McKinsey just completed an annual survey, revealing that for the second year in a row price is the number one consideration for customers changing mobile providers and the percentage for whom that is true has grown considerably," said Tucows CEO Eliot Noss. "That means price ranks above network coverage or device choice. And we know that last year was the first time that that was true in this McKinsey study.[47]

Ting Made a One Time Accounting Change in How Tucows Measures Active Accounts

"This is the result of a one-time change in how we measure active accounts," said Tucows CEO Eliot Noss. "Specifically we have now removed all accounts going back throughout our history that we proactively suspended for nonpayment.[48]

Tucows Will Go into 2015 Unhedged Against the US Dollar Which Could Add $1 to 1.5 Million Yearly EBITDA

"With the movement in the Canadian dollar over the past six or so months, I wanted to take this opportunity to provide an update on our hedging program. As a reminder, we generate revenue in U.S. dollars, but the majority of our operating expenses are in Canadian dollars and therefore, we engage in foreign exchange hedging to provide certainty around future costs. The appreciation of the Canadian dollar has been a bit of a headwind really over the last decade or so, as our expenses were that much higher relative to our revenues. You see that reflective in our 2014 numbers and our guidance. However, with the recent weakening of the Canadian dollar, we now have a bit of a tailwind. We have typically hedged out 18 months or so, but are now only hedged through the end of 2014. Thus, if the foreign exchange rate stays more or less in its current range, EBITDA could benefit by as much as $1 million to $1.5 million in 2015 relative to this year.[49]

November 12, 2014: Tucows Announces Intention to Commence Dutch Auction Tender Offer

Tucows announced on November 12, 2014 that it expects to commence within 30 days of this announcement a "modified Dutch auction" tender offer to repurchase a number of shares of its common stock not to exceed an aggregate purchase price of $8.0 million. Tucows will select the lowest single per-share purchase price that will allow it to buy up to $8.0 million of its outstanding common stock at completion of the Tender Offer. The specified range is yet to be determined but is expected to be in the range of $16.00 to $18.00 per share. [50]

August 12, 2014: Tucows Announces Second Quarter Results

Ting Added 12,000 Accounts and 18,000 Devices

"Q2 was another solid quarter of customer growth for Ting," said Tucows President Elliot Noss. "On our last call, we projected that Q2 net adds would land somewhere between those of Q3 and Q4 of last year, or between 11,000 and 12,000 accounts. We ended up matching Q4, adding just over 12,000 accounts and 18,000 devices. That represents a 20% growth in our customer base in total, bringing our totals to over 73,000 accounts and 112,000 devices."[51]

Ting Now Has 73,000 Accounts and 112,000 Devices

This has brouhgt "our totals to over 73,000 accounts and 112,000 device" said Noss.[52]

Churn Rate Was Between 2 and 2.5 Percent

"Churn for Q2, and in fact pretty consistently for the past year, was in the 2% to 2.5% range per month," said Tucows President Elliot Noss. "We provide this number for two main reasons. First, this is the number one data request from investors as they build out their financial models. We always try and provide as much transparency as possible in order to allow investors to track the business."[53]

Customers are Spending $35 Per Month on Their Phone Bill

"Customers are spending about $35 a month on their phone bills," said Tucows President Elliot Noss. "Gross margins are 45% to 50%. We spend under $100 to acquire a customer. We’ve added 15,000, 16,000 new customers on a gross basis each of the last three quarters and have churned between 2% and 2.5% of our base."[54]

Cost to Acquire a Customer if $100

We spend under $100 to acquire a customer," said Tucows President Elliot Noss.[55]

Gross Margins Are 45 to 50 Per Cent

Gross margins are 45% to 50%," said Tucows President Elliot Noss.[56]

Ting is the Primary Driver on Gross Margins

"Yes, but I think that the primary driver on gross margins will continue to be Ting’s percentage of the business," said Tucows President Elliot Noss. "So Ting is growing so much faster than the domain side of the business and has appreciably better margins. So that will be the primary impact. You’ll see margin continue to pick up, but slowly and on a decreasing percentage of the total business."[57]

May 14, 2014: Tucows Announces First Quarter Results

Ting Had 61,000 Accounts and 94,000 Devices at the End of the Quarter

"Q1 was another record quarter for customer loyalty," said Tucows President Elliot Noss. "We added nearly 13,000 in accounts net and more than 20,000 devices, bringing our totals to more than 61,000 accounts and 94,000 devices at the end of March."[58]

Ting Added 13,000 Accounts and 20,000 Devices

"Q1 was another record quarter for customer loyalty," said Tucows President Elliot Noss. "We added nearly 13,000 in accounts net and more than 20,000 devices, bringing our totals to more than 61,000 accounts and 94,000 devices at the end of March."[59]

Ting's Gross Margin is Between 45 and 50%

Importantly, even after lowering our data pricing in February, our gross margin percentage remained in our targeted 45% to 50% range," said Tucows CEO Elliot Noss.[60]

Churn Rate Was Not Given

"One, I'll be a lot more comfortable putting out a churn number when the Sprint network hopefully settled down in terms of having an impact over the next couple of quarters. I listened to their calls with great interest and I am looking forward to the call where they say, our network's no longer having an impact on churn because when impacts them, it impacts us," said Tucows CEO Elliot Noss.[61]

February 12, 2014: Tucows Announces Fourth Quarter Results

Ting Had 48,000 accounts and 74,000 devices at the End of the Quarter

Moving to Ting metrics, Q4 was another outstanding quarter. We added more than 12,000 accounts and more than 18,000 devices beating Q3’s record numbers and bringing our totals to 48,000 accounts and 74,000 devices at the end of December.[62]

Ting Added 12,000 accounts and 18,000 devices During the Quarter

Moving to Ting metrics, Q4 was another outstanding quarter. We added more than 12,000 accounts and more than 18,000 devices beating Q3’s record numbers and bringing our totals to 48,000 accounts and 74,000 devices at the end of December.[63]

Gross Margin and Churn Not Given for This Quarter

Importantly gross margin percentage, annual customer contribution and customer acquisition costs continue to be right where we would like them. Last quarter I talked about our rate of growth leveling off subsequent for the launch of iPhone 5C and 5S and iOS 7.[64]

Reference: What Analysts Say About Tucows and Ting

January 15, 2015: Max Lukenbach writes that Social Media May Be Useful for Predicting Ting Intra-Quarter Subscriber Growth

Max Lukenbach wrote in Seeking Alpha on January 15, 2015 that Ting subscriber growth is a key component in determing Tucows valuation but since Tucows only discloses subscriber growth on a quarterly basis he has developed an alternative method to estimate growth through measuring Ting's visibility on social media platforms such as Facebook and Twitter. "I have tracked Ting's social media growth against two of its primary peers, FreedomPop and Republic Wireless," writes Lukenbach. "I initially anticipated this to be a very casual endeavor, so that explains the limited number of MVNOs that I collected data for. I plan on adding a more MVNOs and will monitor a wider base going forward. With that said, I still argue that FreedomPop and Republic Wireless are useful and relevant comparisons."

Lukenbach's results show that Ting's Q3 to Q4 growth on Facebook was 32% compared to 13% for Freedompop and 2% for Republic Wireless. The corresponding growth on Twitter for Q3 to Q4 growth is 75% for Ting, 6% for Freedompop, and 3% for Republic. "This analysis demonstrates that Ting appeals to a younger/tech-savvy demographic, people are very happy with the product, and Ting's churn rate is likely to remain low. Furthermore, it illustrates that the company is proactive on social media, which is a low-cost and modern form of advertising."[65]

January 15, 2015: Hugh Pickens comments on Max Lukenbach's Methodology for Estimating Ting's Intra-Quarter Grwoth Rates

One of the problems for an investor in Tucows is that subscriber growth figures are only disclosed during the quarterly earnings conferences calls leaving investors in the dark outside these four times a year. This means that there are only four yearly opportunities for Tucows' investors to evaluate execution versus projections and there are only four opportunities for the growth figures to act as a catalyst on the stock valuation. Congratulations to Mr. Lukenbach for his insight that there may be a way for investors to gain some insight into subscriber growth on a more frequent basis and that there is probably a correlation between Ting social media mentions and subscriber growth. Thanks for compiling the data to date, and in developing a method that with more data and analysis will become very useful to investors in predicting Ting's intra-quarter subscriber growth. Mr. Lukenbach has provided a methodology that allows investors to make an informed estimate on subscriber growth between the quarterly conference calls. I look forward to Mr. Lukenbach gathering more data and to seeing how well social media mentions correlate with subscriber growth and churn.

I agree with Mr. Lukenbach that Tucows has been very astute in using social media as a cost effective way to publicize Ting and that this will probably have the most impact in reaching early adapters who are just the people people Ting needs to get the word out about their offering.

I am also looking forward to the rollout of the GSM offering and seeing what effect this will have on subscriber growth. I have the greatest respect for Elliot Noss' vision and his execution of Ting's growth plan and I hope that at some point he will begin providing Ting subscriber growth figures on a more frequent basis.[66]

December 23, 2014: MacroLion Writes at Seeking Alpha that Ting's Profitable Growth Points To 30% Upside in Tucows Stock Price

MacroLion, a growth investor, wrote at Seeking Alpha on December 23, 2014 that:

  • Recent 10-Q reports and management calls allow us to quantify the trajectory and economics of Ting's growth. Ting will drive company EBITDA from $8m in 2013 to $19m in 2015.
  • Ting's growth is extremely profitable: it requires only S&M investments which deliver 165% IRR.
  • The rest of Tucows business in terms of revenue and gross margin is growing (retail) due to top product offering and new gTLDs.
  • 2014 10-K is the catalyst: 2014 is the first year when Ting is noticeably contributing to EBITDA. Ting's potential is under the radar for most investors.
  • Market EV/EBITDA LTM = 20.1х, EV/EBITDA 2015F = 8.1х.

"Taking Ting net customer growth as the key driver and assuming 50-150k customers range for 2015-17, we derive a target price of $20-29.," writes MacroLion. "It could be achieved in 1-1.5 years time when Ting's growth economics and trajectory are discussed in financial reports."[67]

December 23, 2014: Hugh Pickens Comments on MacroLion that He Has Come to Similar Conclusions

Hugh Pickens wrote a comment to the article in MacroLion on December 23, 2014.

Good Article. I've independently come to similar conclusions with my financial model of Ting at: http://tingmodel.com My takeaways from Tucows recent performance are that:

  • Tucows (TCX) stock price has quintupled since launching Ting in 2012.
  • Ting is the high growth business segment of Tucows.
  • Up until the 4th quarter of 2014 Ting has contributed modestly to Tucows' bottom line.
  • A financial model of Ting's past growth predicts that Ting will soon overtake domain services to become the dominant driver for Tucows' future growth.

My model shows 146,000 Ting customers by 2015F under the 16k quarterly growth scenario and 161,000 Ting customers under the 18% quarterly growth scenario which is in line with your prediction of 143,000.

I had a previous concern that problems with the Sprint network could cause customers to leave Ting and that Sprint's poor reputation could provide a drag on Ting. However, Tucows recent announcement that they will be providing nationwide GSM service (probably through T Mobile although their partner has not yet been announced) mitigates that risk and should accelerate growth in Ting's customer base since Ting will be able to provide better coverage and start selling the iPhone 6 in February 2015.

My only real concern with Tucows at this point is with their recent decision to buy a majority stake in Blue Ridge InternetWorks and enter the independent Internet service provider business space. I am concerned that this might be a mis-step that may divert resources from their other two business lines and that Tucows might be better advised to concentrate on the MVNO business segment which by 2016F will become the primary profit center for the company.[68]

July 11, 2014: Tucows: Putting Its Customers And Shareholders First

Undiscovered Stocks, a private investor who tries to find microcap stocks that are growing and could get sell-side coverage and potential up listings as they continue to execute, wrote at Seeking Alpha on July 11, 2014 that Ting just passed the two-year mark, and has been accelerating customer adds while expanding margins at the same time. and as Ting begins to ramp considerably in the next year and beyond, the company will show significant flow-through to the bottom line.

Undiscovered Stocks writes that Ting's differentiators include:

  • Customer Service. "Ting is all about customer service. For example, when you call in, you always get a real service agent without going through the hoops of an automated prompt."
  • Honesty and Transparency. "The company culture itself is also very honest and transparent. Ting is treating its customers with respect and attention, regardless of if the customer is paying $10/month or $100/month."
  • Lower Rates. "Ting has been lowering rates but Tucows stated in the last earnings call that even though it lowered Ting’s price, the gross margins remained in the targeted range."
  • No Contracts. "Ting does not lock its users into any contracts. Customers can leave whenever they want, but due to the great customer service, the company is anecdotally experiencing less churn than other MVNOs."

According to Undiscovered Stocks, as Ting continues to become a bigger part of the revenue mix, "I expect EBITDA and cash flow to increase significantly." "Given the pace of Ting’s growth in customers, I believe that Ting will grow customers 100% in 2014, 70% in 2015, and 40% in 2016. As the operating leverage kicks in, Ting will double the overall company’s EBITDA by 2016."[69]

July 11, 2014: Elliot Noss Has Executed a Long Term Plan to Increase Stockholder Value

Hugh Pickens wrote at Seeking alpha on July 11, 2014 that Tucows CEO Elliot Noss has executed a long term plan to increase stockholder value with stock buy-backs, the reverse split, and capitalizing on Tucow's core competency in phone based customer service to enter the high growth MVNO business segment. "Noss has quadrupled Tucows' stock price since the beginning of 2012. At this point, I think there is limited downside potential given Tucows very stable and well run core business as a domain name wholesaler and a high probability of a substantial increase in the stock price within two years as we watch Tucows execute its Ting growth plan. Ting's use of social media to reduce customer acquisition cost is working to plan and Ting's infrastructure has gotten all the early bugs out and is now in place and ready to scale up for high annual subscriber growth."[70]

March 28, 2014: "Tucows Is A Scrappy Tech Company Cannibalizing Itself"

Mike Arnold wrote at Seeking Alpha on March 28, 2014 that to ramp growth at Tucows, management recently introduced "what I believe is a game changing business called Ting which I believe will be a catalyst for increasing Tucows' valuation." According to Arnold, Ting appears to be catching on. "Revenues for Ting increased from $4 million in 2012 to $16.5 million in 2013, a 400%+ increase. There is plenty of tarmac for growth as well, considering the wireless communication sector is a multi-billion dollar industry and consumers are actively looking for ways to manage their monthly overhead."

Arnold says that once Ting is more established, one way to compare it might be to assess the lifetime value of the customer relationship to other subscription type businesses. "In this case, magicJack (CALL) might be a good proxy of value, as it operates in the same industry and is innovating both in terms of developing a disruptive telecommunications technology and unique value proposition for its customers. This, too, could prompt a re-rating in Tucows' shares."

Arnold concludes that at the current $140 million market cap, "I think there is little risk of permanent downside, and a rather good chance of Tucows becoming a meaningfully larger company if it executes its growth strategy (Ting) and returns value to shareholders in an accretive manner (buybacks)."[71]

Reference: Latest News About Sprint

December 15, 2014: eWeek Says Sprint Won't Seek T-Mobile Merger Again

Todd R. Weiss reported on eWeek on December 15, 2014 that Sprint's parent company, Japan's Softbank, is no longer considering a rumored second attempt to acquire T-Mobile U.S., less than four months after the first merger attempt was dropped in August. According to Weiss, following the aborted merger attempt, Sprint shook up its executive ranks by replacing its CEO, Dan Hesse, with Marcelo Claure, the founder and CEO of Brightstar, a subsidiary of Softbank. Then in December, Sprint Chief Financial Officer Joe Euteneuer announced at an investor conference that things have been getting back on track at Sprint with huge progress made in getting the company's wireless network updated. Sprint had been experiencing network problems and customer losses due to service dissatisfaction in the recent past, but the company's network build-out is now "substantially complete" and will help drive a push for more subscribers, Euteneuer said. Sprint has also started some serious attempts to increase its customer base, thanks to a half-price wireless service offer it made recently to existing customers of competitors Verizon Wireless and AT&T if they move their service to Sprint.[72]

December 7, 2014: Brian Nichols writes: Is 2015 Make or Break for Sprint?

Brian Nichols writes in an opinion piece in Seeking Alpha that Sprint has consistently lost customers for several years because of the poor quality the Sprint Network which recently was rated worst of the big four large telecoms by a survey in Consumer Reports. Sprint has recently announced an aggressive price cuttting plan, vowing to cut AT&T and Verizon customers' bills in half, in exchange for their business in the hope that aggressive pricing will lead to renewed interest in the carrier's services.

"The problem is that Sprint has lost 336,000 and 181,000 post-paid subscribers in its last two quarters, respectively," writes Nichols. "Not to mention, Sprint was recently voted the worst carrier in the U.S. by Consumer Reports. This means Sprint has to overcome quite a bit of negative consumer sentiment in its attempt to grow its subscriber base larger." According to Nichols if Sprint fails to attract new customers with its price cutting plan, it's tough to find a scenario where Sprint comes out on top. "As a result, I think a share price below $3 by the end of next year is very possible, and that a long-term price target of $0 is not out of the question. Needless to say, I would not invest in Sprint at any price, as I see no value based on the most likely of scenarios."[73]

November 20, 2014: Consumer Reports Rates Sprint as Worst Mobile Network

Brian Nichols reported at Motely Fool on December 1, 2014 that according to Consumer Reports. Sprint is the nation's worst cell phone service provider. Consumer Reports surveyed approximately 63,352 people across 26 major metropolitan areas. It found that Sprint received "dismal" marks in value, voice, text messaging, and 4G reliability. "That said, there are a few areas where Sprint's results may have been altered by consumer perception, rather than reality. For example, Sprint's wireless service plans are mostly all cheaper than the equivalent plans from AT&T and Verizon. So Sprint's "dismal" value ranking is a bit odd," writes Nichols. "Not to mention, Ting, a small carrier that ranked number one nationally in the survey actually uses Sprint's network. Ting is a mobile virtual network operator, further supporting the notion that consumer perception may be driving the results in this study."[74][75]

Consumer Reports reached out to several of the carriers in their survey for comment. Elliot Noss, CEO of Ting, was ecstatic. "What we do is actually sort of obvious," he said. "We offer fair, honest pricing that doesn't penalize customers for using too much or too little. Our customers seem to appreciate it and we certainly appreciate this recognition from them."[76]

According to Consumer Reports, Ting has perhaps the simplest plan of all—you pay a monthly fee for each device on the plan, then you are billed at the end of the month for the voice minutes and data that you use. The less you use, the less you pay. Both carriers scored high in our Ratings.[77]

Reference: Latest News About Other MVNOs

January 21, 2015: Google to Start an MVNO?

Paul Lily writes at Hot Hardware that according to subscription site The Information and the "three people with knowledge of the plans," Google will soon tap into networks belonging to Sprint and T-Mobile for its new service, buying wholesale access to mobile voice and data in order to make itself a virtual network operator. According to Lily, Google's interested in expanding its business outside of its core to "spur broader industry change." "Google's already doing this with its Google Fiber initiative, and since it's already a major player in mobile, offering cellular service isn't exactly a stretch," writes Lily adding that the project will be known as "Nova," and is reportedly being led by Google's Nick Fox, a longtime executive with the company.[78] According to Mikey Campbell Google first reached out to Sprint over a potential MVNO partnership 18 months ago and employees have already beta tested the service. Campbell adds that the carriers have reportedly taken a wary approach to the proposed deal. Sprint, for example, is said to be inserting contract terms that trigger new negotiations if Google's customer base hits a certain level.[79]

Ting Welcomes Google to the Fray

Andrew Moore-Crispin wrote on the Ting Blog of January 22, 2015 that Ting welcomes Google to the fray. "There are more than enough disenfranchised customers of the major carriers to go around. With three years in the game, we’re available to chat—to hangout, as it were—but it seems only fair that you buy whatever drinks will be had when we do." Moore-Crispin says that Google’s entry into the market will be the first a lot of people will hear about “MVNOs” as an alternative to the majors and just adds more legitimacy and helps to dispel the myth that MVNO customers get second-rate service. "We’ll out odds on our approach of putting customers in control of their devices and ultimately, their bills and of having real, human beings pick up the phone when it rings."[80]

December 12, 2014: Vodophone to Launch US Service in late 2015 with T-Mobile Targeting Wholesale Subscribers

Phil Goldstein reported on December 12, 2015 that Vodafone Group's Vodafone Americas unit is scheduled to launch in the late fall of 2015 and is being positioned as a tool for enterprises and wholesale subscribers looking to have wireless service in the U.S. Vodafone said it wants to cater to its more than 400 multinational customers based in the United States and a further 500 Vodafone multinational customers that are based outside the United States but have a "strong U.S. presence."[81]

External Links

Other Stocks I Invest in and Monitor

Financials and Earnings Reports Overview

Earnings Reports Referenced in This Document

Earnings Reports Referenced in This Document

Transcripts of Earnings Converences Referenced in This Document

History of Ting

Competitive Analysis

Canadian Dollar

Tools

References

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  2. Android Headlines. "Ting Rates Among Highest Wireless Providers For Satisfaction In Latest Consumer Reports Survey" by Justin Diaz. November 20, 2014.
  3. Tucows' (TCX) Q3 2014 Results
  4. Tucows' (TCX) Q2 2014 Results
  5. Tucows' (TCX) Q1 2014 Results
  6. Tucows' (TCX) Q4 2013 Results
  7. Tucows' (TCX) Q4 2013 Results
  8. Seeking Alpha. Comment to "Tucows: Ting's Profitable Growth Points To 30% Upside" by Max Lukenbach. Januayr 18, 2015.
  9. Exchange Rates. "Pound To Dollar Long-Term Forecast 2015: Further GBP USD Exchange Rate Softness" by Tony redondo. January 3, 2015.
  10. Tucows' (TCX) CEO Elliot Noss on Q3 2014 Results - Earnings Call Transcript
  11. Tucows' (TCX) CEO Elliot Noss on Q2 2014 Results - Earnings Call Transcript
  12. Tucows' (TCX) CEO Elliot Noss on Q1 2014 Results - Earnings Call Transcript
  13. Tucows' (TCX) CEO Elliot Noss on Q4 2013 Results - Earnings Call Transcript
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  16. Wikipedia. "FreedomPop" retrieved December 2, 2014.
  17. Wikipedia. "FreedomPop" retrieved December 2, 2014.
  18. The Next Web. "FreedomPop approaches 250,000 subscribers for its free mobile service" by Josh Ong. May 14, 2014.
  19. USA Today. "Sprint in talks to buy wireless startup FreedomPop" by John Shinal. November 12, 2014.
  20. GigaOm. "Updated: Is Sprint buying another MVNO? FreedomPop downplays rumors of acquisition talks" by Kevin Richard. November 12, 2014.
  21. NBC News. "Sprint Buys Virgin Mobile in $483 million Deal" July 28, 2009.
  22. Fierce Wireless. "Sprint buying Virgin Mobile USA for $483M" by Phil Goldstein. July 28, 2009.
  23. Fierce Wireless. "Sprint buying Virgin Mobile USA for $483M" by Phil Goldstein. July 28, 2009.
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  27. Ting Blog. "Welcome, Google. The water’s fine." by Andrew Moore-Crispin. January 22, 2015.
  28. Ting Blog. "Ting on a GSM network: Breaking radio silence" by Justen Burdette. January 21, 2015.
  29. The Whir. "Ting Brings Internet Service to City-Owned Fiber Optic Network in Maryland" by Nicole Henderson. January 13, 2015.
  30. Tucows Press Release. "Tucows Inc. Announces Final Results of Dutch Tender Offer" January 8, 2015.
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  32. FierceWireless. "Sprint MVNO Ting adds support for GSM service, likely with T-Mobile" by Phil Goldstein. December 9, 2014.
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  34. Tucows. "Ting to Add Service on a GSM Network" December 9, 2014.
  35. Nasdaq. "Tucows Announces Commencement of Dutch Auction Tender Offer" December 8, 2014.
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About the Author

Hugh Pickens

Hugh Pickens (Po-Hi '67) is a physicist who has explored for oil in the Amazon jungle, crossed the empty quarter of Saudi Arabia, and built satellite control stations for Goddard Space Flight Center all over the world. Retired in 1999, Pickens and his wife moved from Baltimore back to his hometown of Ponca City, Oklahoma in 2005 where he cultivates his square foot garden, mows nine acres of lawn, writes about local history and photographs events at the Poncan Theatre and Ponca Playhouse.

Since 2001 Pickens has edited and published “Peace Corps Online,” serving over one million monthly pageviews. His other writing includes contributing over 1,500 stories to “Slashdot: News for Nerds,” and articles for Wikipedia, “Ponca City, We Love You”, and Peace Corps Worldwide.

Disclaimer

I am long term investor in Tucows. The purpose of this web site is to monitor my investment in Tucows and to do that I compile information and news releases including earnings reports, earnings conferences calls, press releases, and independent reporting on Tucows and Ting. In addition I have built a financial earnings model keep track of how Ting has performed in the past and make predictions on how it will perform in the future.

This web site is not affiliated in any way with Tucows. This web site is operated by a private investor who owns stock in the company and uses this web site to follow the company. All information on this web site comes from publicly available sources. Nothing in this report is to be taken as a recommendation to buy or to sell stock in Tucows.

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This web page is frequently updated so check back periodically to see the latest information or subscribe to the rss feed for this article. If you have any information or insights that you would like to see added to this report please contact Hugh Pickens by email at hughpickens AT gmail DOT com.

Copyright

The material in this article is licensed under under the Creative Commons under an Attribution-Noncommercial-Share Alike 2.0 Generic license. Except for short, fair use excerpts, the material on this article cannot be used for commercial purposes without permission of Hugh Pickens. Attribution for use of any material from this article must be provided to Hugh Pickens and if used on the web a link must be provided to http://hughpickens.com.

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