Tucows, Inc. Q3 FY2023 earnings call

Management Statement and Operational Highlights

• Domains: Continues to return to normalized business trajectory in 2023. Q3 transactions up 3%, domains under management up slightly year-over-year. Focus on managing for margin and developing new services. Completed migration of two new clients onto registry services platform. Working on modernizing web hosting for small resellers and creating new billing/provisioning experience for resellers.
• Wavelo: Delivered strong quarter in revenue and gross margin, with strongest quarter of adjusted EBITDA since launch. Experienced outsized revenue recognition annually in Q2 related to bundled professional services, but adjusting for that, revenue and gross margin grew quarter-over-quarter. Seven quarters into operating as standalone business with disciplined cost management.
• Ting: Total serviceable addresses and Partner addresses increased year-over-year. Fiber CapEx down in Q3 but resumed in Q4. Best quarter for new subscribers over last seven quarters with 2,600 net subscribers added. Gross margin and revenue grew year-over-year. Announced partnerships in Memphis and expanded footprint in Tucson. Focus on effectively scaling business in larger and more diverse markets

Segment Performance

• Tucows Domains: Revenue for Domain Services in Q3 was $61.1 million, up 1% from $60.3 million in the same quarter last year. Gross margin was $18.4 million, up 1% year-over-year. Adjusted EBITDA was $10.9 million, up 5% from Q3 of last year. Revenue in wholesale channel was unchanged, retail channel revenue up 9% with gross margin up 17% year-over-year. Combined renewal rate at 78% in Q3.
• Wavelo: Revenue was $11.1 million in Q3, an increase of 174% from $4 million in Q3 2022 and 3% from last quarter. Gross margin increased by 176% to $10.5 million from $3.8 million in Q3 2022. Adjusted EBITDA was $4.2 million, way up from a loss of $0.9 million in Q3 2022.
• Ting: Total serviceable addresses for Ting-owned infrastructure were 114,500, up 28% year-over-year; Partner addresses at 25,400, up almost 36% year-over-year. Revenue grew 17% year-over-year to $12.9 million. Gross profit increased 20% year-over-year to $8 million. Gross margin was 62% in Q3 2023, up slightly from 61% in Q3 last year

Guidance

• For 2023, EBITDA on the TCX side is expected to be $55 million to $60 million.
• For the Ting side, there is an EBITDA loss expected to be $42 million to $45 million

Risks

• Markets both public and private are continuing to reshape after 15 years of cheap capital, which could impact actual results.
• The macroeconomic environment weighs on the stock market, exacerbating the gap between public and private valuations.
• The traditional off-ramp for venture capital and private equity investments is less available, affecting capital allocation.
• Network expenses increasing due to higher depreciation of fiber network assets, people costs, and impairment costs related to fiber capital assets

Q: Shareholders, analysts and prospective investors are invited to submit questions to Tucows management via e-mail at ir@tucows.com until Thursday, November 9. Management will either address your questions directly or provide a recorded audio response and transcript that will be posted to the Tucows website on Tuesday, November 21, at approximately 4:00 P.M. Eastern Time.

A: Please submit questions to ir@tucows.com by Thursday, November 9, and look for recorded Q&A audio response and transcript on Tucows website on Tuesday, November 21 at approx 4:00 PM Eastern Time