Tucows Inc. Fumbles Q2 Earnings but Keeps Full-Year Targets Intact

Domain-name registrar and virtual telecom Tucows (TCX -0.17%) reported second-quarter results this Wednesday night. The company is working its way through some operating challenges as recent acquisitions and broadband service rollouts put a damper on Tucows' bottom line.

Tucows' second quarter by the numbers

Data source: Tucows.

The company also tracks and reports a non-GAAP profit metric known as adjusted EBITDA. This figure is reportedly used in Tucows' internal financial planning and is often the only metric for which management provides any guidance targets. Starting from a normal EBITDA figure, Tucows also backs out non-cash and one-time charges such as stock-based compensation, foreign exchange effects, acquisition-related costs, and adjustments to the value of long-term contracts.

In the second quarter, the adjusted EBITDA profit rose 7.8% year over year and stopped at $11.2 million. Against that backdrop, Tucows' management simply reiterated their profit guidance for the full fiscal year, pointing to roughly $54 million in adjusted EBITDA. Hitting that target on the nose would work out to a 7.4% improvement over the $50.3 million seen in 2017. Over the first two quarters of 2018, Tucows has amassed a total adjusted EBITDA of $21.6 million, leaving the company to collect roughly $16 million in each of the next two reporting periods.

Image source: Tucows.

Segment results

Ting Internet revenue rose 46% year over year to $1.9 million. The fiber-optic broadband service recently opened new markets in Charlottesville, Va., Westminster, Md., and Holly Springs, N.C., and these long-term growth projects come with a few operating challenges in the short term.

Regulatory slowdowns and labor shortage have delayed network installation projects in some of these service areas, reducing the expected network reach in 2018 and pushing the full installations out to later periods in 2019. While these network rollouts are ongoing -- followed by an upcoming launch in Sandy Point, Idaho -- Tucows will see the installation costs putting pressure on its profit margin.

The Ting Mobile wireless network increased its second-quarter revenue by 10% to $22.4 million. A growing subscriber base boosted service sales, while device sales increased at a slower pace. The virtual network, which resells packaged network services from Sprint (S) and T-Mobile (TMUS 0.47%), would probably be able to simplify its back-end contracts if its service providers close their proposed merger, so Tucows investors should keep a curious eye on how that deal is working out.

Finally, Tucows' bread-and-butter domain-names division continued to integrate recently acquired rival eNom's operations into the larger Tucows services. The company recorded 4.4 million new domain registrations, representing a 2% increase over the combined Tucows and eNom registrations in the same period of 2017. Seventy-nine percent of expiring domain registrations were renewed across both the retail and wholesale portfolios. That's a modest increase in the larger wholesale bucket and a steady hand on the smaller retail wheel.

Run away! ... Right?

The operating story remains solid, but Tucows investors are staring down a weak slate of bottom-line results. The Ting Internet slowdown caused Tucows to fall far short of Wall Street's earnings consensus of $0.52 per share. The stock looks destined for an 11% lower price at Thursday's opening bell. Tucows shares had already taken a 19% haircut year to date before this report.

Tucows is an interesting little growth stock with nearly no analyst coverage, whose solid long-term business plan is clouded by short-term expansion challenges right now. The stock will still look expensive because of the lower earnings figure, but I would still recommend seeing this drop as an inviting buy-in window.