Tucows Inc.

Welcome to 2CAL's first quarter 2024 management commentary. We have pre-recorded prepared remarks regarding the quarter and outlook for the company. A 2CAL's generated transcript of these remarks with relevant links is also available on the company's website. In lieu of a live question and answer period following these remarks, shareholders, analysts, and prospective investors are invited to submit questions to 2CAL's management. Please submit questions via email to ir at 2cows.com until Thursday, May 16th. Management will either address your questions directly or provide a recorded audio response and transcript that will be posted to the 2Cows website on Tuesday, May 28th at approximately 4 p.m. Eastern Time. We would also like to advise that the updated 2Cals Quarterly KPI Summary, which provides key metrics for all of our businesses for the last five quarters, as well as for full years 2022, 2023, and 2024 year-to-date, and also includes historical financial results, is available in the Investors section of the website. The updated TingBuild scorecard and investor presentation are also available. Now for management's prepared remarks. On Thursday, May 9th, 2Cows issued a news release reporting its financial results for the first quarter and in March 31st, 2024. That news release and the company's financial statements are available on the company's website at 2cows.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 2Cal's President and Chief Executive Officer, Elliot Noss. Go ahead, Elliot.

Thanks, Monica. A comment before our results. Public markets can still work for capital light cash generating businesses. 2COW's domains, like all of our businesses, is structured to generate a high volume of subscription-based transactions. After 24 years of operations, that business is well-established globally and generates strong defensible cashflow. The core segment is low growth, but there are nice opportunities to layer in higher growth. The stalwart domains business has functioned within the 2Cows family as a driver of the stock price through buybacks made not to support the stock, but rather to invest in existing cash flows at great prices. It has also been a critical cash generator for building internet businesses with the potential for outsized long-term growth. It has helped fund the generational fiber opportunity and early work with WaveLo. The long-term capital requirements for multi-generational fiber infrastructure are significant and often at odds with the short-term view of the markets. We've built resilient, future-proof fiber networks and a standout ISP. But we continue to be heads down on solving the capital needs for further expansion of that business beyond our current resources. Although there are headwinds there in the current interest rate environment, fiber remains a generational and outsized opportunity for long-term growth that is attracting a lot of capital. though not public capital. WaveLo leveraged the existing assets and traditional strengths of 2Cows, as well as consolidated cash flows into a nice high margin business with almost unlimited upside potential that is now ramping up its go-to-market efforts after a busy year of migrating dishes boost subscriber base. I say all this to say we have a clear view of the public markets as a great home for capital-light, cash-generating businesses. We are under no illusions. Now for our results. Our first quarter 2024 saw strong year-over-year performance for revenue, gross margin, and adjusted EBITDA. Consolidated net revenue for Q1, 2024 increased 8.7% year over year to 87.5 million with strong dollar gains from all three businesses. Wavelow benefited from a fully migrated boost subscriber base. Ting from another record quarter of subscriber growth and Domains from the solid performance for which it is known. Gross margin in Q1 grew 30.3% year over year to $18.3 million. The growth came from all three businesses with Wavelow doing the heaviest lifting. Adjusted EBITDA for the first quarter of 2024 increased 38.7% to $4.2 million. The increase was primarily driven by strong growth of the Wavelow business. Behind the positive headline numbers is continued focus on positioning each business for healthy long-term growth while carefully managing operating expenses and paying down our debt. In Q1, we continued to deleverage the business with $5.5 million in payments on the syndicated debt. Now we'll hear from the heads of each business, as well as from our CFO, Dave Singh, who will cover our financial results in detail. The first speaker is Dave Warrick, Chief Executive Officer, 2Cows Domains.

Go ahead, Dave. Thanks, Elliot. The first quarter for 2Cows Domains reflects the consistency of our business. We continue to reliably generate cash while modestly increasing transactions, domains under management, revenue, and margin. In addition, I will expand on an exciting new joint venture called Orange Domains that was announced earlier this year. And I will conclude my comments today with some thoughts on this partnership. In the first quarter of 2024, domains under management and transactions were both up slightly from Q1 of 2023. We're pleased to see that given flat to declining numbers for the industry, including VeriSign. Revenue for domain services for Q1 was $61.9 million, up 4.5% from $59.2 million for the same quarter last year. Gross margin was $18.5 million, also up 5.8% from the same quarter last year. Domain services adjusted EBITDA, which was $10 million in the first quarter, was down 3.2% from Q1 of last year. A couple comments here. First, we operate critical infrastructure, and the scope and scale of attacks on network infrastructure has increased. This required us to add to our investment in cybersecurity, which is a step function increase that's not large, but in a tight business like this, it is a few basis points. And second, there is a timing element to some of our operating expenses this year, which were higher in Q1. We expect these to normalize out over the remainder of the year. Looking at the results from the segments of our business, in our wholesale channel, revenue for Q1 was up 4% compared to Q1 of last year, and gross margin was up 3.2% year over year. Within the wholesale channel, domain services gross margin was up 2% in Q1 compared to the same period last year, while value-added services gross margin was up 5.9%. In our retail channel, revenue was up 7.2% and gross margin was up 13.6% year-over-year. As I mentioned last quarter, the outsized retail margin continues to be a result of the shift of customers from our wholesale channel to retail, which started in Q4 and will positively impact retail margin numbers over the course of 12 months. Our combined overall renewal rate at 76% in Q1 across all Two Cows Domains brands remains within our historical range and above the industry average. I want to close with more information on the March announcement of our partnership in Orange Domains. Orange Domains is a joint venture with Trust Machines and Hero Systems that is working to seamlessly connect domain names, identity, and Web3. This is a long-term initiative and we are a minority partner, but we are quite excited about its prospects. I've spoken previously about the evolution of Web3 and our interest in participating in a future where elements of identity and functionality related to it are delivered using Web3 technology. You may recall I spoke in 2022 about the funding of Unstoppable Domains, which is offering domain name registrations in strings like .crypto and .nft. Although we didn't prefer the particular approach they were taking, we did see the financing as evidence that investors are looking to the future and the convergence of domain names and identity. In this venture, we're providing our expertise in DNS, our registry platform, and distribution through our reseller channel. Trust Machines and Hero are bringing their deep expertise in Web3. It's also worth noting that Don Ruiz, a Two Cows Domains alum, is the GM at Orange Domains. Don brings his extensive domain name industry experience and entrepreneurial perspective to the role, and we're pleased to have him in the leadership seat for this important initiative. In terms of what investors will see coming from this project, we expect to launch a new TLD later this year with distribution and support across all of our registrar brands and that we see bridging the traditional domain name space, Web3, and identity. Now, over to Justin Riley, CEO of WaveLaw.

Thanks, Dave. A year ago at this time, we were in the midst of orchestrating the fastest telecom migration the industry has seen. Putting to test a muscle that we have honed over decades and domains in Ting. Sitting here today, we can see what a few quarters of a fully loaded base on the WaveLo platform looks like and how our team and our platform can deliver this level of scale and operational rigor. It's a long game and we're just getting started. Wavelow's revenues were $9.4 million in Q1, up 28.6% from Q1 2023, and down 1.6% from Q4. Gross margin was $9 million, up 44.1% year-over-year, and down 1.9% from last quarter. Adjusted EBITDA for Q1 was $2.8 million, up 7% from last quarter, and up 732% year-over-year. The year-over-year trends reflect the loading ramp of subscribers onto the Wavelow platform, which did not finish in earnest until summer of 2023. The quarterly trends represent impacts from the right-sizing of DISH's subscriber base across prepaid and postpaid. As they've shared publicly, they expect 2024 to be largely a year of transition. Unlike its competitors, but identical to all successful modern SaaS businesses, the Wavelow business relies on subscription fees, not professional services or maintenance. When you align your business model to scale up and down based on your customer's subscriber base, you are highly reliant on their ability to retain customers and to grow. I'll remind investors that this is a feature, not a bug. We'll win in the long run by being the most customer-centric platform in the world, winning when our customers win, while our competitors focus on in-year, one-time professional services revenues at their customers' expense. Also impacting the adjusted EBITDA trend quarter over quarter is an increased yet conservative investment in our growth teams. We expect to continue to invest there throughout the year as we position Wavelow for the next phase of growth. I am proud of our management team's ability to manage cost in the corridor while simultaneously setting the business up to welcome new telecoms onto the Wavelow platform. On go-to-market, our months-long search for a growth leader has concluded, and I'm proud to announce that Andy Yue has joined us to lead Wavelow's sales efforts. Andy brings with him 25 years of experience selling telecom software around the world, including storied 10 years at Amdocs and Oracle. He shares our thesis of an industry that needs to move from massive professional services to subscription fees like the rest of the internet, and we're excited to have him hit the ground running. As you've heard me say last quarter, 2024 is about building an efficient go-to-market machine that can deliver against our pipeline and provide the seamless and elegant onboarding experience Two Cows is famous for. Since December, we've added four new customers to the Wavelow family. Each of these small to midsize ISPs or MVNOs is looking to expand their business on a platform that promises the flexibility and scalability that they've yet to receive from their current vendors. And, as I've said before, although we are battling the long procurement cycles that telecom is famous for, and that are even more commonplace with the macro conditions today, we have some major tailwinds. The move towards mobile fixed convergence, cloudification of critical systems, and the need to accommodate both prepaid and postpaid billing, all of which benefit Wavelet. And in terms of the pipeline, the team continued the trend from last quarter of generating new qualified opportunities. These are a mix of MVNOs, ISPs, and MNOs that are, some for the first time, picking their heads up to question if there is a better way to operate. Wavelow is the answer to that question. I remind investors that MNOs are big game. They take a long time to work through the pipeline, but are both the most lucrative opportunities in our space and the ones that would most benefit from what Wavelow provides. As I look at the progress we've made and what we've built in a short time, I'm incredibly proud. but I'm equally excited for what's to come. With a standout platform, newly added go-to-market resources, and a mission-driven team, we can be laser-focused on our singular goal for 2024, to expand and diversify our customer base via a small but mighty sales team and an industry notorious for outrageous CAC spend. Thanks for listening. Now over to Elliot.

Thanks, Justin. Q1 was another strong quarter for new subscriber additions for Ting, with 2,700 net new subscribers growing 25.6% year over year and taking us to over 46,000 subscribers in total. We also had a 22.5% year over year growth of completed serviceable addresses in Q1, taking us to 124,000 serviceable addresses for Ting-owned infrastructure. We are currently being more conservative with our capital, which has moderated our serviceable address additions this quarter. Our partner markets are continuing to ramp up their builds with over 70% growth in addresses year over year. This brings us to over 157,000 total serviceable addresses across all Ting footprints. Revenue for Q1 grew 19% year-over-year to $14.1 million, and gross margin grew 11% year-over-year to $8.7 million. Adjusted EBITDA came in at negative $9.5 million, which has come down from last quarter. As I have previously stated, we plan to continue to reduce this number. Our first quarter fiber capex is unchanged from Q4 of 2023 at just over $18 million, but continues to be lower than our spends a year ago. I've spoken about partner markets the last couple of quarters and how we're leveraging Ting's expertise to improve partner performance. The next step that we're taking is doing installations for our partners. We've signed a deal in Memphis to do installs for Meridiem and expect to do this in other markets as well. It makes sense in larger partner markets particularly. This allows us to deliver the same end-to-end customer experience in partner markets as we do in our organic-built markets. The general underperformance of construction in partner markets has impacted our results negatively, so this approach really could have huge benefits. This is both profitable and will make it easier for the customer experience in partner markets to more closely resemble organic markets. It's a win-win. One thing many of you know is that the core of 2COW's ethos is commitment to policies that benefit internet users. We actively supported open internet initiatives like net neutrality. One program we celebrated as significant progress towards equality of access was the Affordable Connectivity Program enacted under the bipartisan infrastructure law as the largest internet affordability program in US history. For 23 million households, ACP meant the difference between having functional home internet or not. Way too many poor families rely on mobile data, by far the most expensive data one can buy. Unfortunately, inertia in the current US Congress has led to discontinue funding the program. And when the current funding runs out this month, it may cause many of those households to lose their home access entirely. Given our historical footprint, this will not have a meaningful impact on our results. But all of Ting and all of 2Cows views digital equity as part of what makes us proud to be doing what we are doing. We will continue to agitate for better outcomes. Now we'll hear from 2Cows CFO, Dave Singh, who will discuss our financial results in detail.

Thanks, Elliot. Total revenue for the first quarter of 2024 increased 8.7% to $87.5 million compared to $80.4 million for the first quarter of 2023. When looking across the different businesses, Ting had revenue gains of 19% year-over-year, increasing to $14.1 million in Q1 2024 from $11.9 million in Q1 2023. WaveLow's revenues increased 29% to $9.4 million in Q1 2024 from $7.3 million in Q1 2023. And the revenue for Two Cows Domains for Q1 was up 4.5%, increasing to $61.9 million from $59.2 million in Q1 2023. Corporate revenues were essentially unchanged in Q1 2024 from Q1 2023. Gross profit before network costs for the first quarter increased 14.5% year-over-year to $35.7 million from $31.1 million in Q1 2023. As a percentage of revenue, gross profit before network costs increased this quarter to 41% compared to 39% for Q1 2023. Breaking down gross profit by business, 2K's domains gross profit for the first quarter of 2024 increased 5.8% from Q1 of last year to $18.5 million from $17.5 million. As a percentage of revenue, gross margin for 2K's domains remained unchanged year-over-year at 30% for Q1 2024. Wavelow's gross profit increased by 44% to $9 million this quarter from $6.3 million for Q1 2023, reflecting the full transition from professional services to subscriber-based revenues on the fully migrated Boost subscriber base. As a percentage of revenue, gross margin for Wavelow was 96% this quarter, which is up from 86% in Q1 2023. The increased margin is a reflection of Wavelow's increased efficiency from the fully migrated Dish subscriber base. Ting gross profit for Q1 increased 11.1% year over year to 8.7 million from 7.9 million for the same period of last year. As a percentage of revenue, gross margin for Ting was 62% in the first quarter of 2024, down from 66% in Q1 of last year. Network expenses for Q1 were 17.3 million, up slightly from 17.1 million for the same period last year. Network expenses continue to be driven primarily by the depreciation of our expanding fibre network assets. I do want to remind investors, however, that our network expenses in Q1 2023 accounted for impairment costs that included write-downs of certain fibre capital inventory due to damage and obsolescence. The impact of that write-down is that the year-over-year change in network expenses looks lower than it would have been otherwise. Total operating expenses for the first quarter of 2024 increased 11.1% to $34.8 million from $31.3 million for the same period last year. The increase is primarily the result of the following changes. People costs were up $3.6 million. The majority of the increase came from Ting's reduction in workforce in February. The costs incurred were non-recurring charges consisting of severance payments, notice pay, employee benefit contributions, and outplacement costs. The majority of the total restructuring charges and cash payments were incurred in Q1. Third-party contractor costs, professional fees, travel, and facility costs were up $1 million, and foreign exchange-related expenses increased $0.4 million related to the revaluation of our foreign-denominated monetary assets and liabilities. There was an offset to operating expenses from stock-based compensation, which was down $0.3 million, and lower amortization of $1.2 million in Q1 2024, as we fully amortized intangible assets related to the Melbourne IT acquisition in 2016 and the Enum acquisition in 2017. As a percentage of revenue, year-over-year operating expenses were relatively stable at just under 40% for Q1 of this year and 39% for the same period last year. we reported a net loss for the first quarter of 2024 of $26.5 million or a loss of $2.42 per share compared with a net loss of $19.1 million or $1.77 per share for the first quarter of 2023. The net loss is primarily the result of a higher effective tax rate and interest expenses primarily related to the ABS notes which were issued in May of 2023, higher network depreciation, and a slightly higher but expected operating loss as part of the planned investment in TING. These were offset by lower impairment charges in Q1 2024. Please note that our tax expense reflects our geographic mix with taxes payable in Canada on our legacy domains business. Adjusted EBITDA for Q1 was $4.2 million, up 39% from $3 million for Q1 2023, driven by the strong growth of the Wavelet business year-over-year. The total breaks down amongst our three businesses as follows. Adjusted EBITDA for two-cast domains was $10 million, down 3.2% from Q1 of last year. Adjusted EBITDA for WaveLow was $2.8 million, a nine-fold increase from $0.3 million last year. Adjusted EBITDA for Ting was $-9.5 million, compared with a $-9.3 million in Q1 2023, as we continue to invest in Ting's fiber network expansion. And finally, the corporate category had adjusted EBITDA of $0.9 million this quarter, down from $1.6 million in Q1 last year. The decrease is primarily driven by a lower contribution from the legacy mobile base. Turning to our balance sheet, cash and cash equivalents at the end of Q1 2024 were 66.6 million compared with 92.7 million at the end of the fourth quarter of 2023 and 11.8 million at the end of the first quarter of 2023. In addition to the 66.6 million, we have 12.8 million classified as restricted cash as part of the ABS transaction in 2023. As a reminder of the 12.8 million of restricted cash, 8.8 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 is distributed monthly as interest to note holders, fees to third parties, and with the remaining funds coming back to Ting. I will also note that we generated $1 million in interest income this quarter. During the quarter, we had $5.7 million in cash from operations compared with $5.3 million in Q1 of last year, with the increase in negative cash flow driven primarily by the ongoing investment into Ting Fiber operations. We invested $14.3 million in property and equipment, primarily for the continued build-out of the Ting Fiber Network, in addition to the continued investment in the Wavelow platform. Note that this number reflects the actual cash paid for capital assets in the quarter on a cash flow statement and includes capitalized cash interest. As of March 31, 2024, our syndicated loan balance for covenant calculation purposes was a net $200 million when factoring in letters of credit and cash on hand of up to $7.5 million, which resulted in a leverage ratio of 3.25 times. This is the fourth consecutive quarter we have reduced the leverage ratio. We repaid a net $5.5 million on the balance of the loan this quarter and expect quarterly repayments to continue. Finally, deferred revenue at the end of Q1 was $155 million, up from $148 million for the fourth quarter of 2023, and also up from $151 million for the first quarter of 2023. This is primarily due to the stabilization of domains' revenues now that the pandemic impacts have normalized. That concludes my remarks, and I'll now turn it back to Elliot. Thanks, Dave.

Last week was the annual Berkshire Hathaway annual meeting, the first without Charlie Munger. I always view this meeting as a bit of a bellwether, and this year was no exception. There were two things I took away. Not Warren's views on crypto or AI, nor his views on interest rates or inflation. What I paid attention to was a huge and growing cash hoard and Apple as their continued largest holdings. Those may seem like non-items, but they tell a story. The two points combine to reinforce things I've been talking about. That the market is exceedingly concentrated and that investors, and therefore the market, is more short-term than it has ever been. It is a market that has more dollars chasing fewer companies and, likely due to the amount of money concentrating in the largest index funds, we see returns concentrating into the largest stocks. At the same time, we see the world's greatest value investor piling up cash. Warren famously says, we only swing at pitches we like. And he makes clear that in this market, he doesn't see a lot he likes. He, more than anyone, knows about the corrections to come in the private markets as PE, VC, and commercial real estate work through the overvalued portions of their portfolios in a process that will take years. More importantly, he suffers from the short-term focus of markets more than anyone. It is tough to look for value when the market only rewards scale and short-term story. We see these macro trends reinforced to the fiber market, which had two big stories this quarter. Digital Bridge making an unsolicited offer for Wide Open West, and EQT combining with T-Mobile to take the Lumos fiber assets and split them into infrastructure and ISP, similar to our partner markets. Both items are further reminders that the long-term nature of building and operating infrastructure like fiber assets is not rewarded to the public markets. In fact, it's clearly viewed negatively. And the latter item is the first large deal that validates the split between infrastructure and operating assets that we have been pursuing since 2015. What all of the above reinforces is that the one and arguably successful way to navigate the public markets, if you are not one of the biggest seven companies in the world, or are not a stock selling the current story and trading it impossible to maintain multiples, is to require low amounts of capital to generate cash on a consistent and ideally growing basis, and to use that cash to distribute to your shareholders through either buybacks or dividends. Following that path does not require analysts. It does not require mainstream institutional investors. This is the approach we followed with great success from 2008 through 2014 with our eight Dutch tenders and plenty of open market buyback activity. In 2015, we started another cycle of investing in fiber. We've done a great job of building a real business in fiber. We have over 125,000 organic addresses. We have another 200,000 to build in our current footprints, requiring no more market development. And then well over another half a million in our existing partner markets, including two large cities in Colorado Springs and Memphis. But a growing fiber business requires capital. We have every indication that the public markets are not the right place to source that capital. If you look at TCX, the market is saying that if we turned over the keys of the Ting fiber business to its lenders for nothing, that our stock price would likely skyrocket. That is market inefficiency. Inefficiencies create opportunities. We have a good sense of what the inefficiencies are and a track record of exploiting them. We are looking forward to the rest of 2024 and to the long-term future. 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 ir2cows.com by May 16th and look for our recorded Q&A audio response and transcript to this call to be posted to the 2Cows website on Tuesday, May 28th at approximately 4 p.m. Eastern Time. Thank you.