Draft of Q1 2017 TCX Results
August 8, 2017: Tucows Reports Continuing Strong Financial Results for Second Quarter of 2017
Original financial documents are available at:
- Tucows' (TCX) Q2 2017 Results August 8, 2017
- 2017 Q2 Consolidated Balance Sheets August 8, 2017
- Tucows' (TCX) CEO Elliot Noss on Q2 2017 Results - Earnings Call Transcript August 8, 2017
Net Revenue: Quarterly Net Revenue Increased 78% YOY
Tucows announced on August 8, 2017 that net revenue for Q2 2017 increased 78% YOY to $84.2 million from $47.2 million for 2016.
Net Income: Quarterly Net Income Increased 29% YOY
Tucows announced on August 8, 2017 that net income for Q2 2017 increased 29% YOY to $5.0 million from $4.0 million for 2016.
EBITDA: Quarterly Adjusted EBITDA Increased 50% YOY
Tucows announced on August 8, 2017 that Adjusted EBITDA for Q2 2017 increased 50% YOY to $10.3 million from $6.9 million for 2016.
Enom: Q2 Marks the First Quarter of Contribution from Enom Acquisition
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that the second quarter marked Tucows' first full quarter of contribution from the Enom acquisition that was completed on January 20, 2017. All of the numbers presented for this quarter reflect the consolidated business.
Operating Expenses: Total Operating Expenses for Q2 increased 50% YOY
Davinder Singh told analysts at the Q2 Conference Call on August 8, 2017 that total operating expenses for the second quarter of this year increased 50% to $14.3 million up from $9.5 million for the same period last year. The majority of the increase is due to the additional Enom operational expenses.
Capex: Capex for Ting Internet Came in at $3 million for the Quarter
In answer to a question from Hubert Mak, Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "in terms of CapEx, the big things that really have sort of taken that number way down, especially, I mean, thinking now at this point of having even thought $30 million, $35 million back in that kind of October, November time frame, it's really us learning the cadence that cities work at. So in that number, we had Holly Springs starting, I want to say, 4, 5 months ahead of when it actually started. That of course pushed back some of the customer adoption as well, because you can't sell what you don't have.
We also had both Centennial and Sandpoint being further along, kind of now we would've seen both of those as being kind of in construction in the second half of the year. And it looks like we're doing good work in both places, but I don't know if we're going to get a shovel in the ground this year in either place. So what I'll tell you -- I mean, the best thing I can tell you, Hubert, is we're learning and we're trying to be more accurate. We will be more accurate every year that goes along, and we're trying to be -- kind of to give people pretty good visibility as we're going through. I'd like to be spending more money.
Noss previously told analysts during the 2017 first quarter earnings conference call on May 9, 2017 that Capex will "be less than $30 million, $35 million, and the primary reason is because governments, municipal governments are just a little slower than we might expect. We have to build up our expertise at estimating their timelines. And I think we kind of had a little bit of happy years maybe in a couple cases and that'll slow down the spending. But I'm going to give you some more detail on that next quarter."
Marketing Expense: Marketing Expense Increased $300,000 YOY
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "marketing expenses increased by $300,000 year-over-year, primarily for the acquisition and ongoing support of Ting Mobile and Ting Internet customers; credit card processing fees, primarily to support the growth of Ting Mobile and Ting Internet; facility costs and stock-based compensation increased by $0.4 million."
August 8, 2017: Ting Mobile Had Their Best Quarter Ever of Net Adds
Net Adds: Ting Mobile Added 4,500 Accounts in Q2
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "Ting Mobile is currently at 170,000 accounts and 278,000 devices, up significantly from the 151,000 accounts and 245,000 devices we had just 2 quarters ago. Of the 19,000 additional customers, about half were RingPlus and half were organic growth. We originally talked about 5,500 organic adds last quarter. After digging into the data a little deeper, it appeared the more accurate number would be 5,000 in Q1 and 4,500 and Q2, both significant increases from the 3,000 adds in each of the 2 prior quarters. And the early part of Q3 looks like it is continuing to see improved gross adds, although we note that this competitive environment continues to get more difficult." 
Churn: Churn is Down to 2.19%
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "Ting Mobile had another outstanding quarter of retention, with monthly churn, not including RingPlus customers, at just 2.19%, down from 2.27% in Q1 and 2.38% in Q2 of 2016. It was the lowest churn we've seen in our customer base in 2 years. As I said last quarter, I am especially comforted to see such healthy churn just as mobile carriers are aggressively ramping up their promotions and cable operators are rolling out their mobile offerings. Remember that Ting is probably the easiest postpaid service in the industry to leave. These churn numbers seem to validate our strong belief that people would come to Ting for the savings and stay for the customer experience. I will remind you that churn historically goes up in Q3 and again in Q4, but with monthly churn numbers of 2.27% in Q1 and 2.19% in Q2, we're starting in a great place."
Churn: Ting Mobile is Working on Tactics to Reduce Churn Months or Years into the Future
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "We're also doing some really encouraging work with our customer data, identifying tactics today that could reduce our churn months or years into the future. For example, looking back over the past year, we measured a significant improvement in survival rate or, said differently, a significant reduction in churn among customers who have [indiscernible] their devices with us. This has us particularly excited about the ramp in iPhone sales in our shop since the Apple deal we mentioned last quarter. Most of those sales are going to existing customers. It also has us promoting new devices more aggressively to customers that are holding older models or gone long periods without an upgrade. With 278,000 active devices, customer retention starts to rival customer acquisition and its potential impact on the business. Combined with our increased emphasis on data gathering and analysis, we hope to discern a whole new set of rich strategic opportunities."
Ringplus: Ting Mobile Still Has 9,100 Customers from Ringplus
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "we initially migrated over 45,000 accounts. 22,000 of those initially accepted our terms of service, gave us a valid credit card and set up an account. 4,500 had departed even before the end of Q1, leaving us with 18,500. We fully expected many more to leave us in the months to follow, as happens with any involuntary migration. In Q2, about 9,400 more RingPlus customers left, with about 9,100 remaining. Diving deeper, that trend was 4,100 cancels in April, 3,100 in May and 2,200 in June, and we've seen even fewer RingPlus cancels again in July. It is tough to say when we get to a cohort that behaves like typical Ting customers in lifetime value, but we're quite happy with what we got for the effort expended."
Competition: The Landscape in Mobile is Increasingly Competitive
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "it now seems clear that there will be more casualties in the mold of RingPlus. Customers of these services can be a challenge, as they've often grown accustomed to unsustainable pricing models. But those pricing models, by definition, will get tougher to find. What is appealing about these customers is that they have picked up their heads and looked beyond the major carriers. This is the first crucial step to discovering Ting. As I've said before, we are well positioned as the credible, sustainable alternative to major carrier plans and major carrier experiences. Whether it is through so deals with the outgoing MVNOs themselves or campaigns directed to their customers, I'm hopeful more of these losses could be our gains."
Price: Ting Mobile is Not Ready to Pull the Price Lever Competitively
In answer to a question from Hubert Mak, Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that Ting Mobile is not ready to pull the price lever competitively. "pull a price lever competitively. I think that one of the things we've talked about in the past is where we could probably have the most impact on prices is in data, but that's where our costs are the worst. And so there's probably not a lot we can do there. And so what you'll see us doing is doing things sort of more tactically all the way across. So that's at that marketing level, at that churn level. Putting iPhones in the mix gives us a little bit more in terms of levers around equipment and things we can do there. We've added financing recently and have a pretty significant portion of our customers picking that up. And so it's really -- it's like the marketing. I'll expand that thought. It's a bunch of little things.
So we don't think there's a silver bullet. We do feel good about kind of doing that 95%, 100% over of a couple of quarters. IF you look at the first half of 2017 relative to the second half of 2016, it's over a 50% pop in gross adds. We feel good about that. That's outside of RingPlus. So as we start to maybe see more of those types of opportunities, we can look at those as sort of accretive on top of the growth picking up a bit. And then, of course, part of that is the churn, where, again, we think we're just getting smarter at the data level and we're digging in more. And so it's just work. I really, really don't think there's a silver bullet in any of this."
Advertising: Ting Mobile Has Been Tinkering with the TV Ads
In answer to a question fromRalph Garcea, Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "we've had some successes with a couple different tactics I -- that I don't want to go into specifically but that were new to the marketing mix. And I think where we're really getting more and more comfortable with is that it is a lot of little things, and then it's each thing a little bit better over time. So we're really doing what we like to do, which is put our heads down and grind. I wish I had a big dramatic "here's a couple thousand per quarter" addition that we could point to, but there isn't. I really think, in terms of customer acquisition tactics, the things that may be emerging, and we'll see if the traffic yields any outcomes, but some of this sort of smaller MVNO or less focused MVNOs who sort of talk with us about taking over customer bases because there is more, certainly, message traffic than there's been."
August 8, 2017: Ting Internet Continues its Progress
Charlottesville: Charlottesville is really only limited by how many customers we can install in a week
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "Charlottesville is really only limited by how many customers we can install in a week." "While Charlottesville continued its steady growth in Q2, the combination of Westminster and Holly Springs, both at earlier stages, more than doubled in customers, recurring revenue and, most importantly, operational capacity."
Charlottesville: Tucows Has Spent a Lot of Time Re-auditing Charlottesville to Make Sure it Could Accept all the Growth that it Could
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "in Charlottesville, it's a little bit different because we bought an existing network. It didn't have the same sort of planned and staged rollout. In fact, one of the things that we spent a lot of work on in the last couple of months is kind of a re-auditing of the Charlottesville network to kind of refit it and make sure that it was set to accept all the growth that it could."
Westminister, Holly Springs: The Combination of Westminster and Holly Springs More than Doubled in Customers
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "the combination of Westminster and Holly Springs, both at earlier stages, more than doubled in customers, recurring revenue and, most importantly, operational capacity." 
Westminister: Growth in Westminster Is Limited by How Quickly the Town can Expand the Network
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that growth in Westminster is only limited by how quickly the town can expand the network.
Holly Springs: Growth in Holly Springs is Limited by How Quickly We Ourselves can Expand the Network
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that growth in Holly Springs is limited by how quickly we ourselves can expand the network.
Centennial, Sandpoint: Centennial and Sandpoint Are in the Early Stages of Network Planning and Deployment
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "in both Centennial, Colorado, and Sandpoint, Idaho, we're finally in the early stages of network planning and deployment."
Centennial, Sandpoint: Ting May Not Get a Shovel in the Ground This Year in Centennial or Sandpoint
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "we also had both Centennial and Sandpoint being further along, kind of now we would've seen both of those as being kind of in construction in the second half of the year. And it looks like we're doing good work in both places, but I don't know if we're going to get a shovel in the ground this year in either place."
Capacity: Ting Internet is Building Capacity for its Services
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "since we launched this service, our efforts have been much less about building demand for our services and much more about building capacity to serve the demand. This capacity includes install teams and processes, network expansion, network equipment and operations, pull permits, trenching technologies, customer support teams, industry knowledge in the form of senior hires, and of course, a pipeline of potential new Ting talents. It also includes city and incumbent relations, digital divide projects and dealing with the additional complexities of business and enterprise customers. And the theme over and over again is finding efficiency and scalability through systems and processes.
Capacity: Ting Internet is Forcing Itself to Operate with Three Active Towns Just Like We Would With Thirty
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "we are forcing ourselves to operate with 3 active towns like we would with 30." "Particularly when you are a challenger, and one that is eager to please as we are, it is tempting to so solve a problem for one customer or one town that is not necessarily repeatable for others. So we are forcing ourselves to operate with 3 active towns like we would with 30. Of course, all within the context of viewing these as hyper-local businesses. In terms of demand, people simply seem to want the product we're offering at the price we are offering it. We are doing a great job integrating ourselves into these communities and demonstrating that we are a different kind of provider."
Adaption Rates: Ting Internet Still Expect 20% Adoption Among Serviceable Addresses in a Year and 50% in 5 Years
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "we continue to expect 20% adoption among serviceable addresses in a year and 50% in 5 years. These take rates, and with all the operational improvements I've mentioned, will be paying about $2,500 to $3,000 per customer, and those customers will be worth about $1,000 a year in margin."
Expansion: Ting Internet is in Active Conversation with Other Potential Towns
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that Ting Internet is "in active conversations with some viable prospects to be new Ting towns. I note that these discussions are always necessarily quiet until they are not."
In answer to a question from Patrick Retzer, Noss added the following: "So I will say, if you made me guess whether there would be new markets announced between now and year-end, my guess would be yes. There's lots of dialogue, there's lots of action. I did want to call out very specifically in the script that sometimes these things are just subject to confidentiality, and sometimes you have city processes where cities themselves have to be very deliberate in who they talk to, when they talk to them and how they talk to them. And so I think we've always got to be respectful of cities in their processes. And as you can imagine, these things, any discussion about core infrastructure, like fiber, will be politicized and necessarily, and I think just by its existence. I don't think it's a right or a left, or a red or a blue issue, but I do think that it is very impactful at a municipal level. And so you just we have to be a little careful, that's all. But yes, I would not be surprised with an announcement or 2 before the year ends, and I won't be disappointed if there's not."
Competition: Ting Internet is Very Confident in its Ability to be Flexible and Adaptive Against Larger Competitors
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "that I'm very confident in is our ability to be quite adaptive, quite flexible and I almost want to use the word adventurous. And I say that because, look, we're -- we've spent the bulk of our professional lives in deep Internet-centric markets. Telecom tends to be a little bigger, a little slower, a more -- a little more ponderous, a little more conservative. I think there's going be a lot of change at this next transition point, and I think that, that serves us well. It's kind of the more variables you throw into the mix or the more sort of pivot points, I think, the better served we are. Sometimes some of you have heard me say, talking about competing in the hypercompetitive, tiny-margin domain registration world and then moving into telecom, it was like moving from altitude to sea level with richer oxygen.
And I think that if and as, what, the speed of competition and the speed of the need for adaptation to market picks up, I think that serves us. I think it plays to our strengths and I think it plays away from some others. Now of course, we have a real weakness there, which is that we're small. The incumbents who are slow in pondering have a real advantage in that they're big. But that big will also tie them not only to practices but to -- practices in terms of business processes, but also to particular approaches to the market. We are -- because we're an MVNO, the bad news about being asset-light in this market, so we're not tied to anything. So we really get to deal with this change as it lands, and we're pretty excited about that."
August 8, 2017: The Integration of eNom is Going Well
eNom: The Integration of OpenSRS and Enom continues to Go Well
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "looking at our Domains business, the integration of OpenSRS and Enom continues to go well as we pool people, knowledge, code and technology to ultimately deliver a greater experience to our resellers and synergies to our shareholders. We continue our efforts to deliver these benefits by 2019, with the caveat that the European Union General Data Protection Regulation, or GDPR, could impact our timing. I will describe this in more detail in a moment."
eNom: Feedback from Industry on the Integration is Positive
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "we are now just over 6 months into operating the Enom business and have had the opportunity participate in a number of industry events and hosting conferences with both brands. Feedback from resellers as well as suppliers and other industry members has been universally positive. Bringing these 2 businesses together was a logical evolution for both businesses from our perspective, and clearly, that has resonated with our target audience. We are acknowledged for our leadership role in the wholesale domain market and for having the expertise and resources to build something special and continue as a trusted supplier. Our resellers tell us that they look forward to seeing what we can do with the combined businesses. In fact, a number of resellers have domains on both platforms and they look forward to us simplifying their business operations."
eNom: The Bulk of the Acquisition Benefits Come from Retiring the Platform at the End of Integration
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "the bulk of the acquisition benefits come from retiring the platform and a lot of the data center kind of lockout density that is associated with the Enom platform. And those things don't come until right at the end of the integration work. So we're kind of where we are until we're not. But what's important is, because it's a big body of work, that the work is tracking well as it is."
Renewal Rates: Why There is a Big Difference in the Renewal Rates between Enom and OpenSRS
Elliot Noss told analysts at the Q2 Conference Call on August 8, 2017 that "the primary reason for the difference in rates -- well, there's 2, but the biggest component is the different nature of customers. So one of the things that I talked about, if you'll remember on the last couple of calls and in connection with the transaction, the Enom business has more traditional web-hosting companies in North America and Western Europe, whereas, on the OpenSRS side, we've done very well in those next-generation web-hosting companies and in parts of the developing world. And we really see a lot of the sort of difference in those customers' performance manifest in different renewal rates. And so that's not going to change, because what'll happen, really, over time is we'll just move everybody to a new platform."
"We're not going to call them one customers or the other. We might maintain the brand, but we're kind of looking at them on par. If you were to go back in time, 5 years, 8 years ago, you would have still seen a differential in renewal rates between the 2 businesses. Not quite as large, but at that point, it was because we had more of the larger customers who sort of valued the deeper customer relationship. And the Enom platform did a better job of getting the customers as they were sort of coming out of the gate and getting started. Their onboarding process was better, and a couple elements of their platform just made it that, that smaller, longer-tailed customer was there. And there also tended to be a couple few point difference in renewal rate that would be driven by that. So because it's about the type of customer, it's not just some sort of kind of widget in the machine that we can kind of get in and tinker with and change. So I think that we knew what we were getting when we signed up, and we're quite fine with that."
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