2025-Q1-TCX-results-Q&A-transcript

Introduction
Monica Webb, Vice President, Investor Relations

Welcome to Tucows’ question and answer dialogue for Q1 2025. Elliot Noss, President and Chief Executive Officer of Tucows and Ting, and Dave Woroch, CEO of Tucows Domains will be responding to your questions. For your convenience, this audio file is also available as a transcript in the Investors section of our website, along with our Q1 2025 Financial Results and updated reports. I would also like to remind investors that if you would like to receive our quarterly results and Q&A via email, please make the request to ir@tucows.com.

Please note that the following discussion may include forward-looking statements which are subject to risks and uncertainties that could cause actual results to differ materially. These risk factors are described in detail in the company's documents filed with the SEC, specifically the most recent reports on the Forms 10-Q and 10-K. The company urges you to read its security filings for a full description of the risk factors applicable to its business.

Today’s commentary includes responses to questions submitted to us following the prerecorded management remarks regarding the quarter and outlook for the Company. We are grouping similar questions into categories that we feel are addressing common queries. If your questions reach a certain threshold or volume, we may ask you to schedule a call instead to ensure we can address the full body of your questions. And if you feel that the recorded questions and/or any direct email you may receive do not address the full scope of your questions, please let us know.

Go ahead, Elliot.

Remarks

Elliot Noss

Thank you, Monica. And welcome to our Q&A for our first quarter 2025 financial results.

Several reasonable concerns were raised this quarter regarding Ting's balance sheet and its future outlook.

I will start by being clear that our best path forward is to take advantage of our over 130k owned addresses and use them to lower the debt on the Ting balance sheet and become to the greatest extent possible, a capital-light, asset-light, ISP.

The questions highlight the need to provide more long-term context and operating detail for what a capital-light ISP could look like.

First, I want to remind shareholders that we’ve been thinking about these concepts for over a decade. From the very beginning of our entry into fiber, we’ve said each fiber footprint has three distinct components: capital, construction, and ISP. You can see our belief in this clearly in our early partnership with the city of Westminster, Maryland—really the first of its kind—in 2015. That has been a productive 10-year relationship, with a take rate in the low-to-mid 40s and a profitable operation.

Since that time—and particularly over the last five years—we’ve seen examples around the world, and especially in North America, of telecoms monetizing their infrastructure. Specifically, this means separating the ISP operation, which owns the customer relationship, from the physical network infrastructure. Some of the world’s largest private equity firms—BlackRock, KKR, Brookfield—along with many mid-sized PE firms, have pursued this strategy. And yet, there are very few ISPs that are interested in being tenants on these networks. We have discussed previously that almost every ISP in the current US fiber landscape is owned by private equity. And private equity wants to own infrastructure. In fact, when we’re in discussions with prospective netcos, our competition is typically limited to AT&T and T-Mobile. We think there is a white space opportunity in being a capital-light, asset-light ISP.

Let’s talk about the economics of operating a capital-light ISP. Operationally, the structure is very similar to a traditional ISP. The main difference is that the cost of network maintenance and repair shifts from the ISP to the netco. Aside from that, operations remain largely unchanged. Some netcos deal with installations, some don’t.

Of course, the most significant financial difference is the lease cost, or per-circuit fee, paid to the netco. That cost typically falls in the range of $35 to $40 per customer, per month, depending on what’s included.

If you flow all of that through the financial model, a useful—if slightly oversimplified—way to think about it is that net operating margins shift from around 70% in a fully penetrated, traditionally capitalized network to somewhere in the 25% to 30% range in a capital-light model.

At its core, this model represents a different risk-reward balance. The netco enjoys more certainty, while the ISP has more upside. The ISP bears the risk of penetration and ARPU, but also benefits from outperforming on those same metrics. And as I’ve noted before, one of the challenges we've encountered in past equity processes is that our penetration, ARPU, and churn are best-in-class—meaning that private equity firms on the other side of the trade often struggle to normalize or benchmark those numbers.

You’ve heard me say many times that we believe Ting is the best residential ISP in the US. What’s especially notable is that we’ve delivered these results while also operating a construction business and dedicating significant effort to capitalizing the business. Dealing with capital and construction don’t just introduce complexity—they introduce uncertainty. Operating a construction project is a lot like a historical military campaign. If you are idle, you are simply burning through resources keeping the army clothed and fed. And that flows through to other elements of the operation like marketing spend and customer service where CAC and staffing levels are ideally paced in tandem with the construction build. All of this lack of co-ordination leads to elevated costs throughout operations. Accordingly, we believe there is room to improve Ting ISP’s performance across all key measures.

We continue to view the current Ting balance sheet as unacceptable—and potentially even unsustainable. However, we also see real opportunity in our owned infrastructure, of 133,000 addresses. This is where we are spending the bulk of our time and attention.

Based on questions about our ability to buy back stock, I also wanted to give investors a picture of a typical current quarter from a free cash flow perspective. I will use this quarter's $2.5 million syndicated loan repayment as a launch point. This quarter had slightly elevated levels of balance sheet due to a seasonal receivable build. Other than that, I remind investors that Wavelo has a level of capitalized labour that is higher than a typical Tucows business; between $1.5 to 2 million per quarter. As many of you know, we would love to report cash EBITDA, but are precluded from doing so. A typical quarter in 2025 will generate free cash to allocate, of between $5 to 6 million, but if there is one thing the last couple of years have taught us is there is rarely a "typical" quarter. I want to be clear that there is no tradeoff between servicing the debt within the Ting business and our decision to repurchase TCX public stock—this quarter or any other. As always, there are three primary reasons we might not be buying stock: first, if we didn’t believe the stock offered good value—and I think it’s clear that’s not the case today. Second, if we lacked the necessary cash. Or third, if we were involved in discussions that would preclude us from doing so. These will continue to be our guiding considerations.

Remarks

Dave Woroch

We received a question about the metrics we would track moving forward on the Tucows Domains’ growth initiatives, and more specifically in reference to Storefront and cloud hosting, not registry services. For Storefront, we’re focused both on the number of orders processed, as well as the revenue and margin per order. Today this is revenue from domain transactions, and in time we expect that APRU will increase with the bundling of additional Tucows value added services. For cloud hosting—which I remind investors is a higher-margin service than our core Domains offering—the number of websites added is the critical metric. In both cases, these are currently modest numbers, and we will share progress on these metrics as they become material. And the last point I want to reinforce is the value of our reseller channel, which provides the potential for broad distribution and low customer acquisition costs, but at the same time the channel is measured in their pace of adoption.

Close

Monica Webb

Thank you for listening to our Q&A and a reminder that if you feel that the recorded answers or any direct email you receive do not address your question, please follow up with us at ir@tucows.com.