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Earnings Call Analysis
Summary
Q2-2024
In Q2 2024, revenue rose 5.2% year-over-year to $89.4 million. Ting and Domains drove strong gains, with Ting revenue growing 17% to $14.6 million. Consolidated gross profit increased 15.4% to $20.8 million. Adjusted EBITDA surged 70% to $9.2 million, primarily due to Ting's reduced losses. Operating expenses decreased 5.5%, and the net loss narrowed to $18.6 million from $30.8 million a year ago. The balance sheet strengthened with a $6.5 million debt repayment. New CFO, Ivan Ivanov, highlighted future growth and strategic focus on fiber network expansion and partnerships.
Welcome to Tucows Second Quarter 2024 Management Commentary. We have prerecorded prepared remarks regarding the quarter and outlook for the company. A Tucows generated transcript of these remarks with relevant links is also available on the company's website. We will begin with opening remarks from Elliot Noss, President and CEO of Tucows and Ting, followed by business remarks from Dave Woroch, CEO of Tucows Domains, Justin Reilly, CEO of Wavelo; Elliot Noss on Ting; Ivan Ivanov, Tucows new CFO, who will discuss our financial results in detail and finish with closing remarks from Elliot Noss.
In lieu of a live question-and-answer period following these remarks, shareholders, analysts and prospective investors are invited to submit questions to Tucows management. Please submit questions via e-mail to ir@tucows.com until Thursday, August 15. 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, August 27, at approximately 4:00 p.m. Eastern Time. We would also like to advise that the updated Tucows quarterly KPI summary, which provides key metrics for all of our businesses for the last 6 quarters as well as for full year's 2022, 2023 and 2024 year-to-date and also includes historical financial results is available in the Investors section of the website. The updated Ting Build Scorecard and investor presentation are also available.
Now for management's prepared remarks. On Thursday, August 8, Tucows issued a news release reporting its financial results for the second quarter ended June 30, 2024. That news release and the company's financial statements are available on the company's website at tucows.com under the Investors section. 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-K and 10-Q. The company urges you to read its security filings for a full description of the risk factors applicable to its business.
I would now like to turn the call over to Tucows President and Chief Executive Officer, Elliot Noss. Go ahead, Elliot.
Thanks, Monica. Starting with our consolidated results, the second quarter of 2024 saw solid year-over-year and quarter-over-quarter performance for revenue, gross margin and adjusted EBITDA. It's the third consecutive quarter of growth of our headline metrics and reflective of our work to grow revenue efficiently and employ rigor around cost controls to support continued expansion of margin. Consolidated net revenue for the second quarter increased 5.2% year-over-year to $89.4 million, with strong revenue gains from Ting and Domains. Gross profit in Q2 grew 15.4% year-over-year to $20.8 million. The gross profit growth came from all 3 businesses with Ting doing the heaviest lifting.
Adjusted EBITDA for the second quarter of 2024 increased 70% year-over-year to $9.2 million. The increase was primarily driven by Ting's reduction of its adjusted EBITDA losses and was supported by year-over-year gains from Domains and Wavelo. We continue to balance investment in the businesses with paying down debt. In Q2, we further deleveraged the business with $6.5 million in payments of the syndicated debt. As many of you will exceed, Ivan Ivanov has very recently taken over from Dave Singh as Tucows new CFO. Ivan brings highly relevant expertise, including strategic capital management and lots of exposure to Verizon's fiber business. We are pleased to have him join the executive team, and both Dave and Ivan have worked to create an extremely smooth transition.
I also want to sincerely thank Dave for his impact on Tucows over the last 8 years. Under his stewardship, Tucows has navigated significant growth and changes in our business, and I'm grateful for having him as my partner through it all. The entire Tucows family wishes of the best in his next endeavors and we know he will continue to cheer for us from the sidelines.
Now we'll hear from the heads of each business as well as from Ivan in his inaugural remarks as CFO, covering our financial results in detail. The first speaker is Dave Woroch, Chief Executive Officer, Tucows Domains. Go ahead, Dave.
Thanks, Elliot. In the second quarter, Tucows Domains continue to reliably generate cash, grow our margin and contribute to Tucows adjusted EBITDA. Our Domains under management were up marginally year-over-year and our transactions were down just under 3% from Q2 of 2023. We're pleased that our efforts to grow margin, while being rigorous on cost control, has generated these results, particularly given the declining domain transaction numbers for Verisign. Revenue for Domain Services for Q2 was $62.4 million, up 4% from $60 million for the same quarter last year. Gross margin was $18.9 million, also up 5.2% from the same quarter last year. Domain Services adjusted EBITDA was $11.2 million in the second quarter, up 6% from Q2 of last year.
Looking at the results from the segments of our business and our wholesale channel, revenue for Q2 was $53 million, up 2.9% compared to $51.5 million for Q2 of last year, and gross margin was $13.6 million, down slightly from $13.7 million from Q2 of 2023. Within the wholesale channel, Domain Services gross margin was up 1% in Q2 compared to the same period last year, while value-added services gross margin was down 3.8%.
In our retail channel, revenue for Q2 was $9.3 million, up 10.8% from $8.4 million in Q2 of last year. Retail gross margin for the second quarter was up 23.6% year-over-year. The outsized retail revenue and margin continued to be positively impacted by the movement of some wholesale customers to retail that I have discussed previously, and retail margins are higher than wholesale margins, both as a percentage and in dollars per transaction. Our combined overall renewal rate at 76% in Q2 across all Tucows Domains brands remains within our historical range and above the industry average.
In closing, I wanted to add that we continue to have incremental successes in our registry services business. We recently won the business with [ .music ] to operate their registry back-end. In addition, our Orange Domains joint venture has announced the launch of their first TLD .locker, which will also operate on the Tucows Domains back-end. Both new TLDs are expected to be in general availability before the end of this year. In addition, and specific to the other new services we're developing, we continue to incorporate reseller input into our product development cycle and progress towards what we believe will ultimately deliver a useful and fulsome suite of tools that facilitates adoption.
Now over to Justin Reilly, CEO of Wavelo.
Thanks, Dave. Looking back to a year ago, we were just wrapping up the migration of millions of Boost subscribers to the Wavelo platform. Since then, DISH is focused on optimizing their base for higher-quality subscribers and managing the churn that's all too common in these prepaid businesses. Just recently, Boost launched a new unified brand with nationwide 5G coverage that blurs the line between prepaid and postpaid. And onto our history with Ting Mobile that is a welcome departure from the industry standard, the configurability and flexibility of Wavelo's platform enabled them to deliver this in record time, instead allowing them to focus on customer delight, not technical implementations.
Wavelo's revenues were $10.5 million in Q2, up 11.8% from Q1 and down 2.3% from Q2 2023. The small decrease in revenue year-over-year was driven by less onetime professional services work in the current year as we continue to transition towards recurring platform revenues. As we've previously noted, we experienced outsized revenue recognition annually in Q2 related to the bundled professional services included as part of the platform services provided to DISH. Adjusting for this, revenues were relatively stable compared to Q1, with a small 1% reduction as DISH focused on higher-value subscribers. Gross margin was $10.2 million, up 12.4% quarter-over-quarter and up 1.1% year-over-year, a lift consistent with the discussion on revenues as we recognize the bundled professional services provided to DISH and transition our revenue mix more and more to higher-margin platform services.
Adjusted EBITDA for Q2 was $3.9 million, up 40.3% from last quarter and up 14.1% year-over-year. As we head into a more steady state with DISH, we are pleased with their ability to rightsize their base, position Boost for growth and move from defense to offense in their marketing and product strategies.
On adjusted EBITDA, we continue to thoughtfully manage investment with a focus on margin performance and growth-related hiring. The latter we expect to ramp in the second half of the year as our go-to-market team comes into sharper relief. Last month, we launched product catalog to allow operators flexibility and choice as they navigate the competitive pressures of this current landscape as a go-to-market tool, product catalog allows prospects to choose Wavelo without needing to replatform their entire BSS suite, as more CIOs move towards a best-of-breed strategy, core componentry like product catalog, become important building blocks of their digital transformation. This gives us means of building an initial relationship with room to expand from there as the relationship blossoms.
From day 1, our strategy has been to provide modular software solutions that meet customers where they are and as the cloud transformation in telecom takes shape, this will be all the more important to onboarding new telecoms onto the Wavelo platform. Our teams have spent much of the quarter onboarding the new logos that closed in Q1 and those efforts are going well. I'll remind investors that these are small ISPs. And while the revenues are not material, the go-to-market and delivery muscles being built are fundamental to Wavelo's ability to scale beyond our anchor customers. I am pleased to see our early marketing efforts starting to bear fruit as the number of inbound leads and RFPs are increasing quarter-over-quarter.
In tandem, -- our sales team is refocusing its efforts upmarket on larger MVNOs, MNOs and ISPs. While this naturally means sales cycles elongate, it more strategically positions the business for longer-term profitable growth. And as I've said before, the larger telecoms are the ones who can most benefit from what Wavelo has to offer. As we've discussed before, we are well into an era of telecom colored by consolidation, convergence and evolving customer expectations. Many of the systems in use today were built for the express purpose of managing either fixed or mobile billing and provisioning during a more simple landscape of competition. We've constructed Wavelo to meet the needs that operators have now not yesterday and to run out in front of their needs tomorrow. I've never been more excited to be doing this work at this time and with this tremendous market opportunity ahead of us. Thanks for listening, and now over to Elliot.
Thanks, Justin. In Q2, Ting added 2,100 net new subscribers, growing 10.5% year-over-year and taking us to over 40,000 subscribers in total. We also had a 17.4% year-over-year growth of completed serviceable addresses in Q2, taking us to 120,300 serviceable addresses for Ting-owned infrastructure. Our partner markets are continuing to ramp up their builds with 72% growth on addresses for Q2 year-over-year. This brings us to 164,500 totaling serviceable addresses across all Ting footprints. Revenue for Q2 grew 17.4% year-over-year to $14.6 million, and gross margin grew 39% year-over-year to $9.8 million as we see margins expanding as expected.
Most notably, Ting's adjusted EBITDA loss was reduced to $6.4 million for Q2, down by nearly $4 million year-over-year. And while this pace of change may not continue, we do expect this trend to continue. It's primarily a result of a full quarter of recognition for the reductions in headcount and seeing marketing spend return to more normalized levels. As I mentioned last quarter, my focus is to continue moving the business forward on the path to profitability. We will continue to invest prudently to expand our footprint and our market share. We will continue to be disciplined on cost controls, construction economics and improving our margins. And at the same time, working to maintain Ting's renowned customer experience and low churn rates, all while resolving the long-term capitalization of the business.
Our second quarter Fiber CapEx is reduced from Q1 of 2024 at just over $12 million for Q2 and continues to be lower than our spend a year ago. This is not only us being more judicious on capital deployment -- but it also reflects that while newer markets are in active construction, others such as Culver City, Sandpoint and parts of the Raleigh and Denver regions are now mostly built with opportunistic construction happening when new MDUs or neighborhoods are added. Alexandria is resuming construction after a short hiatus where we worked with the city to get consensus on the right approaches as it relates to construction specifics, traffic management and planning practices in a historic and densely populated city.
While we have nothing specific to share on the further capitalization of Ting, there were a number of important industry events. We continue to see financial markets sustained interest in securitization instruments for fiber deployments -- since Ting did our $239 million securitization in May of 2023, we've seen similar successful structured financings for Ziply, Frontier and ALLO, among others, all well priced. This reinforces our view that the market recognizes the inevitability and long-term profitability of the U.S. coax to fiber transition, and they view the ABS product as a low-risk instrument to participate.
The other trend that Ting was early to embrace that we're now seeing in headlines is partnerships between infrastructure owners and service providers. Back in April, we heard about a joint venture between T-Mobile and EQT to acquire fiber provider Lumos. In the last month, we've seen joint venture discussions between Stonepeak and Frontier and a joint venture between T-Mobile and KKR to acquire Metronet, the first fiber provider to do an ABS transaction. This aligns with our view on both partnerships, bringing together the operational structure of established fiber providers with the financial heft to capitalize on the coax to fiber transition. And the T-Mobile transactions also reinforce the inevitability of convergence of fixed and mobile services and the need for a platform like Wavelo that seamlessly integrates the 2.
Now we'll hear from our new Tucows, CFO, Ivan Ivanov, who will discuss our financial results in detail.
Thank you, Elliot. Starting with revenue. Total revenue for the second quarter of 2024 increased 5.2% to $89.4 million compared to $85 million for the second quarter of 2023. With respect to each business, Ting grew revenue 17% year-over-year, increasing to $14.6 million from $12.4 million in the same quarter last year. Wavelo's revenues decreased 2% to $10.5 million, reflecting a reduction in professional services fees as the business transition to a primarily subscriber revenue basis. Tucows Domains revenue was up 4%, increasing to $62.4 million from $60 million the prior year. Corporate revenue was up 6.4% to $2 million in Q2 2024 versus $1.9 million last year.
Gross profit before network costs for the second quarter increased 11.3% year-over-year to $38.1 million from $34.2 million in Q2 2023. At an efficiency level, gross profit before network costs increased to 42% compared to 20% in the prior year. Breaking down gross margin by business, Tucows Domains gross margin increased 5.2% to $18.9 million from $17.9 million in Q2 2023. As a percentage of revenue, gross margin for Tucows Domains remained unchanged year-over-year at 30%.
Wavelo's gross margin increased modestly to $10.2 million this quarter from $10 million in Q2 2023. As a percentage of revenue, gross margin for Wavelo was 97%, up from 92% in the prior year. The increased margin reflects efficiency from the fully migrated DISH subscriber base. Ting gross margin for Q2 increased 39.2% year-over-year to $9.8 million from $7.1 million for the same period last year. As a percentage of revenue, gross margin for Ting was 67% in the second quarter of 2024, up from 57% in Q2 of last year. Network expenses for Q2 were $17.3 million, up from $16.2 million for the same period last year, largely reflecting higher depreciation of our expanding fiber network assets.
Total operating expenses decreased 5.5% to $29.4 million from $31.1 million in Q2 2023. The decrease is primarily the result of $1.4 million in fully amortized intangible assets from the Enom brand and customer relationships, a $1.2 million reduction in sales and marketing costs primarily from more efficient marketing spend and a $0.2 million reduction in stock-based compensation. The overall operating expense reduction was partially offset by increased costs from contract and professional services, professional fees and foreign exchange related expenses. As a percentage of revenue, operating expenses improved to 33% compared to 37% for the same period last year, largely as a result of portfolio-wide cost management initiatives.
We reported a net loss for the second quarter of 2024 of $18.6 million or a loss of $1.70 per share compared with a net loss of $30.8 million or $2.86 per share for the second quarter of 2023. The decreased loss is primarily the result of continued OpEx reductions, lower income taxes and a onetime debt extinguishment costs in the prior year. The decreased net loss was partially offset by increased interest expense and network depreciation resulting from our expanding fiber network. Adjusted EBITDA for Q2 was $9.2 million, up 70% from $5.4 million for Q2 2023, primarily driven by reduced operating loss from Ting and year-over-year increases from Domains and Wavelo.
The total breakdown amongst our key business units is as follows: adjusted EBITDA for Tucows Domains was $11.2 million, up 6% from Q2 of last year. Adjusted EBITDA for Wavelo was $3.9 million, up 14% from $2.4 million in Q2 of last year. Adjusted EBITDA for Ting was negative $6.4 million compared with negative $10.3 million in Q2 2023, following a reduction in workforce in Q1 of this year. And finally, the corporate category had adjusted EBITDA of $0.5 million this quarter, down from $1.7 million in Q2 of last year. The decrease is primarily driven by lower contribution from the legacy mobile base.
Turning to our balance sheet, cash and cash equivalents at the end of Q2 2024 were $39.2 million compared with $66.6 million at the end of the first quarter of 2024 and $147.9 million at the end of the second quarter of 2023. In addition to $39.2 million, we have $12.9 million classified as restricted cash as part of the ABS transaction in 2023. As a reminder, of the $12.9 million of restricted cash, $8.9 million will sit in a trust account for the duration of the ABS notes. The remaining $4 million reflects the cash collections from the securitized assets, and it is distributed monthly as interest to noteholders and fees to third parties with the remaining funds coming back to Ting.
I will also note that we generate $0.7 million in interest income this quarter. During the quarter, we had negative $4.7 million in cash from operations compared with negative $6.8 million in Q2 of last year, with improvement primarily as a result of a lower operating loss from Ting in Q2 2024 and a onetime debt extinguishment in Q2 of last year used to reduce the [ general ] preferred shares obligation. We invested $16 million in property and equipment, primarily for the continued buildout of the Ting fiber network in addition to continued investment in the Wavelo platform. Note that this number reflects the actual cash paid for capital assets in the quarter on our cash flow statement and includes capitalized cash interest.
As of June 30, 2024, our syndicated loan balance for covenant calculation purposes was a net $192.6 million when factoring in letters of credit and cash on hand of up to $7.1 million, which resulted in a leverage ratio of 3.17x. This is the fifth consecutive quarter we have reduced the leverage ratio. We repaid a net $6.5 million on the balance of the loan this quarter and expect quarterly repayments to continue.
Finally, deferred revenue at the end of Q2 was $156 million, up slightly from $155 million for the first quarter of 2024 and also up from $151 million for the second quarter of 2023. That concludes my remarks. And now I'll turn it back to Elliot.
Thanks, Ivan. For the last few quarters, I've been talking about my strongly held belief that public markets in the summer of 2024 can only sustain 2 kinds of companies. There are those that are story or concept stocks where the goal is to sell to the next person to hear and believe the story. The obvious example is NVIDIA. And there are companies that are capital light and generate a lot of free cash flow. And note, I do not say EBITDA, but truly free cash flow. In fiber, I talked last quarter about the T-Mobile EQT deal among others. This quarter, I mentioned additional data points confirming our views. The numerous additional ABS financings announced, all with lots of demand and all with narrowing spreads. This demonstrates that there is still loads of capital looking for a home and that holders want to deploy as much capital as possible with as little risk as possible.
And as I mentioned, the biggest deal yet in the space with T-Mobile buying a stake in Metronet. We see T-Mobile now partner with KKR in addition to their existing EQT deal. We see a financial sponsor, again, keeping their dollars at work on the network side, while letting T-Mobile take all the ISP risk. We are seeing the continued financialization of fiber to the home as an asset class. Since 2017, we've been talking about how eventually fiber networks will be financialized in the same way that towers were -- the financialization of towers started with the AT&T spin-off that became Crown Castle at the turn of the century. Towers now trade at incredibly high multiples. Who better than AT&T to kick off the financialization of fiber networks with their GigaPower deal.
So where are we? For years, we've been talking about each fiber footprint as having 3 components: capital, construction and ISP. With the deals we have seen and will continue to see, we see the financialization of the output of capital in construction, the networks themselves. This leaves the ISP. So what happens to the ISP when you untether the other 2 pieces? Well, it is generally a capital-light, cash-generative business but it is an operating business that is of little interest to traditional pools of long-term infrastructure capital. They strongly prefer less risk and more structured returns. In terms of the long-term resolution of the Ting business, I have nothing formal to share this quarter, but this remains the top priority. Whatever path we choose to take, it will be greatly informed by this financial backdrop.
When it comes to TCX and the broader market, last quarter, I talked about the Berkshire Hathaway Annual Meeting and the fact that Apple was now their largest holding. This quarter, they announced they had cut their stake in Apple in half. They are seeing what we are seeing. There is now massive concentration in the market with a small number of the largest stocks accounting for a greater and greater share of the total market capitalization. These are now stories, no longer trading on free cash flow. When we look at the cumulative net income of the past 3 years of Microsoft, Amazon, Meta and Alphabet, it was an amazing $570 billion, but they spent a combined $418 billion of that on CapEx alone. They trade at massive multiples of net income. But when we look at free cash flow, it looks like a bubble. We expect this is what Warren Buffett saw.
It feels like we now need to invoke Stein's law. If something cannot go on forever, it will stop. How public companies that consist of capital-light free cash generated businesses behave and how they trade in the future is not clear. It is unlikely to be dividends or buybacks in the way they have been used in the last 10 years or so. We know we think that returning capital to shareholders has always been the right approach. And it's clearly the one that addresses the structure of capital markets in 2024.
And with that, I look forward to your written questions and exploring areas that interest you in greater detail. Again, please send your questions to ir@tucows.com by August 15, and look for our recorded Q&A audio response and transcript to this call to be posted to the Tucows website on Tuesday, August 27, at approximately 4:00 p.m. Eastern Time.
Thank you.