Canadian networking specialist Tucows (NASDAQ:TCX) recently reported first-quarter results. The domain name registrar and parent of Ting mobile and fixed network services missed analyst expectations across the board, as earnings fell 26% year over year on 18% lower revenues.
Tucows also provided management commentary on this difficult quarter in a quirky format. A short collection of prepared remarks was presented on the day of the earnings report, followed by a six-day period where analysts could submit questions by email. Another call covered those questions and management's answers. It's not quite the live question-and-answer session that most companies would offer, but Tucows can arguably give these queries more consideration and better-thought-out responses.
Let's have a look at some of the most worthwhile comments Tucows' management supplied in this unusual manner.
1. The results weren't all that bad after all
While it might not appear to be, the first quarter was, in fact, a solid start to 2019. Total revenue was $79 million, compared to $81.2 million last year, excluding the acceleration of nearly $15 million in revenue resulting from a bulk transfer. ...
Net income was $2.8 million, compared with $3.7 million in Q1 last year, and adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization] was $9.4 million compared to $10.4 million, both impacted by some outsized costs.
-- Elliot Noss, Tucows CEO
So the year-over-year comparison was uniquely difficult because the year-ago period included a one-time $14.6 million revenue boost, as Tucows transferred 2.7 million low-value domain names to former customer Namecheap. That transfer was a court-ordered affair, executed without any baked-in profit margin in order to comply with the terms of a legal settlement.
As for this quarter's "outsized costs," which weighed heavy on Tucows' bottom-line results, Noss was referring to higher network expenses as the Ting Internet service widened its subscriber base by 54%. On top of that, Tucows' appetite for plug-in acquisitions boosted operating costs by 22% due to higher workforce costs.
2. The big idea behind Ting Internet
Our big advantage in fiber long term rests in a much lower cost of acquiring, provisioning, billing and otherwise servicing a customer, while providing a vastly improved customer experience. We have now had enough time in-market to know that we are delivering on this improved service while seeing our costs well within the ranges we had planned for. This is now an exercise in growing this machine with increasing throughput and efficiency.
-- Elliot Noss
Noss likes to think of Ting Internet as "the world's first Internet telecom," built from the ground up as an internet service with telecom features added on top. The name of the game is to grow the fiber-based service's scale as quickly as possible, because there are cost savings to collect as the business model expands to a larger market opportunity. On the other hand, the fiber installation process is both slow and expensive. The long-term growth model will challenge Tucows' management to put the pedal to the metal -- without driving the company into unreasonable debt obligations.
3. How Tucows hopes to reverse mobile subscriber losses
Ting Mobile lost 2.6 million subscribers during the first quarter, and a total of 5.3 million accounts over the last year, stopping at 160 million total accounts. Noss isn't worried about making the final sale to potential customers, but the brand could use some more visibility. Therefore, we're likely to see a larger advertising campaign behind Ting Mobile in the coming quarters:
Investors have also asked about our intentions to drop our mobile pricing. We note that we have a much greater challenge with awareness than we have with conversion or satisfaction. Indeed, our margins have grown over time with reduced carrier costs, and we are considering investing in customer growth. Lower rates help convert prospects that are aware of the service, but do little to drive awareness, which is still our greatest challenge.
Also, lowering rates means paying a significant price on existing customers that are still quite satisfied and still churning at a relatively low rate. Spending that margin on awareness building, and targeted conversion tactics such as trial offers, targeted save tactics, or acquisition offers to other MVNOs [mobile virtual network operators], may end up giving us greater returns on our investments.
-- Elliot Noss