Tucows Inc.

Welcome to 2COW's third quarter 2024 management commentary. We have pre-recorded prepared remarks regarding the quarter and outlook for the company. A 2COW's 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 Tukows & Ting, followed by business remarks from Dave Warwick, CEO of Tukows Domains, Justin Riley, CEO of Wavelow, Elliot Noss on Ting, Ivan Ivanov, Tukows' 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 2Cows Management. Please submit questions by email to ir at 2cows.com until Thursday, November 14th. 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, November 26th at approximately 5 p.m. Eastern Time. We would also like to advise that the updated 2COWS quarterly KPI summary, which provides key metrics for all of our businesses for the last seven 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, November 7th, 2Cows issued a news release reporting its financial results for the third quarter ended September 30th, 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 2COW's President and Chief Executive Officer, Elliot Noss. Go ahead, Elliot.

Thanks, Monica. Last week, we announced major changes to the Ting business. We laid off over 40% of the Ting workforce, mostly those involved directly or in support of market expansion and new plant construction. We have also streamlined other functions within the Ting and 2COWS businesses, which had impacts within 2COWS shared services at the parent level. This was the most prudent way to move Ting to a sustainable cost structure with positive and growing adjusted EBITDA. The plan removes around 22 million in cash operating expenses from the business with the bulk of those reductions in people costs. It was done following extensive exploration of strategic and partnership options for the Ting business to secure equity capital to continue network expansion. I note that we were unsuccessful in finding a long-term common equity partner. Well, all of you will have seen four specific transactions in the Fiverr space in the last year, two with T-Mobile and one each with Verizon and Bell Canada. Those transactions involve companies much, much larger than Ting in scope and scale. There have been little to no common equity transactions in the fiber mid-market in the last year or two. We will stop all expansion into new markets and take a more conservative approach to capital deployment, focusing on success-based CapEx to load the existing 132,000 owned addresses and the over 40,000 partner addresses, as well as the over 500,000 more addresses that will be added by our partners in Colorado Springs and Memphis. We expect this to lead to significant adjusted EBITDA growth for two cows in 2025, and for the ting business to be in and around adjusted EBITDA breakeven in 2025. I do note that Ting will still have over $40 million in interest expense that we will have to pay before spending on success-based CapEx in 2025. At the end of September, we had nearly $80 million in cash on hand, including cash restricted for the ABS. And the first debt expiry we will have is 2028. I will talk more about how we view and how investors should view the Ting investment in my closing remarks. On a consolidated basis, in the third quarter, 2COWS had strong year-over-year growth in revenue, gross profit, and adjusted EBITDA. Ivan Ivanov, our CFO, will cover our financial results in detail. We continue to prioritize deleveraging the business. And in Q3, we made $2.5 million in payments on the 2COWS syndicated debt. which was on the low end of what we expect to pay down quarterly and held down by some one-time expenses. I'll now turn over to Dave Warwick, CEO of Two Cows Domains.

Thanks, Elliot. In Q3, Two Cows Domains delivered our seventh consecutive quarter of revenue growth. We also had solid year-over-year gains in gross margin and adjusted EBITDA, a testament to the reliability of our business, the strength of the brand, and consistent attention to cost control. Our domains under management were up marginally, both year-over-year and quarter-over-quarter. And while our transactions were down 2% from Q3 of 2023, they were stable quarter over quarter. Both measures compared favorably to the results from industry counterparts. Revenue for domain services for Q3 was $64.7 million, up 6% from $61.1 million for the same quarter last year. Gross margin was $19.8 million in Q3, up 8% from the same quarter last year, with strength across the business. Our year-to-date gross margin is up 6%, and ahead of 2023 at this time by $3.4 million, a testament to how we've been able to grow margin in a competitive space, in part due to strong reseller relationships. Domain services adjusted EBITDA was 11.5 million in the third quarter, up 6% from Q3 of last year. Looking at the results from the segments of our business, In our wholesale channel, revenue for Q3 was 55 million, up 6% compared to 51.9 million for Q3 of last year. And gross margin was 14.4 million, up 8% from 13.3 million from Q3 of 2023. Within the wholesale channel, domain services gross margin was up 1% in Q3 compared to the same period last year. while value added services gross margin was up 26% year over year. The large increase in value added services margin was driven primarily by strong non-recurring sales from our expiry stream and to a lesser extent from our hosted email service. In our retail channel, revenue for Q3 was 9.7 million, up 5% from 9.2 million in Q3 of last year. Retail gross margin for the third quarter was up 8% year-over-year. Our combined overall renewal rate at 76% in Q3 across all Two Cows Domains brands remains within our historical range and above the industry average. In summary, the key measures of the health of our business demonstrate that our core business is solid and holding its own relative to our competitors and in a mature industry. We continue to balance cash generation for 2Cows with investment in both our platform and infrastructure, and in developing additional new and complementary services to generate further growth for the business. These are mid-term opportunities for the business, of which our registry services is the furthest along, and the one I will have the most to share and discuss in the coming quarters. Now, over to Justin Riley, CEO of Wavelow.

Thanks, Dave. In Q3, Wavelow delivered another strong quarter of revenue, gross margin, and adjusted EBITDA, further reminding us of how resilient these recurring revenue SaaS businesses can be. Wavelow's revenue was $10.1 million in Q3, a 4% decrease from last quarter, and a 9% decrease from Q3 2023. Gross margin was $10 million this quarter. a 1.4% decrease from last quarter, and a 4.6% decrease from Q3 2023. Adjusted EBITDA for Q3 was $3.4 million, a decrease of 12.4% quarter over quarter, and an 18.5% decrease from Q3 2023. The year-over-year numbers had a couple of drivers. First, in Q3 2023, we billed a full quarter of revenue from Echo Star's freshly migrated Boost prepaid subscribers. I note, we will now be referring to Dish as Echo Star. Since then, Echo Star has focused on optimizing their base for higher quality subscribers, offering postpaid billing, and managing the inevitable churn that's all too common in prepaid telecom. This translated into a reduction of subscribers that has now stabilized. Following the announcement of the sale of Dish's video distribution business and their subsequent capital raise, EchoStar now has the focus and resources to grow their wireless subscriber base. Also, as we previously noted, we experience outsized revenue recognition annually in Q2 related to bundled professional services included as part of the platform services provided to EchoStar, which impacts our quarter-over-quarter results. Adjusting for these lumpy non-cash impacts, revenue and gross margin actually grew slightly at $0.02 million and $0.29 million, respectively, quarter-over-quarter. On adjusted EBITDA, we continue to thoughtfully manage investment with a focus on margin performance and an eye towards future growth. As we enter the back half of the year, we are in our final hiring motion for our MVP sales and marketing team. On EchoStar more specifically, They've had a busy few months addressing core issues in their capital structure. We are pleased with the progress and the runway they have created to focus on customer acquisition and loading their brand new 5G network. I note, it is now a lower cost, higher performing network that all of our U.S. shareholders should be using. We've provided them with unparalleled flexibility in their business to merge their prepaid and postpaid offerings, test out new offers, and optimize their base across three networks. This makes Boost the most dynamic mobile provider in the country, powered by Wavelow's event-driven platform. Our delivery teams have now completed the onboarding of new customers that closed in the first half of the year, and all new logos are now live on the Wavelow platform. I'll remind investors that these are smaller ISPs, and while the revenues are not material relative to our anchor customers, these efforts prove Wavelow's software works well for all sizes of telecoms, and that our migration muscle, built up over two decades, continues to be a differentiator when compared to our competitors. That said, as I shared last quarter, our sales teams have focused their efforts upmarket on larger prospects. These are larger M&Os, MVNOs, and ISPs whose systems complexity is at a near breaking point. While these sales cycles are naturally elongated, both the deal and delivery complexity work in our favor as our platform is uniquely positioned to help solve enterprise-grade problems at scale. These conversations are deeper in our funnel than ever before, and now that we have a mostly hired go-to-market team, we expect the funnel to grow with more of these opportunities over the next few quarters. These are the places where we can have the most impact on the most Telecom customers, as the inefficiency of this legacy software is felt in every part of the customer journey. Telecom is heading into an era of compounding inefficiency as it contends with convergence, consolidation, and a shift in customer needs. Customers are looking to be rewarded for bringing their share of wallet to a single provider, annual device upgrades are waning in popularity, and the M&A activity is naturally furthering the software bloat inside of these assets. The legacy systems providers are complicit here, and the only way forward is through. Simply bolting AI on top of a broken back office will compound decades of telecom inefficiency. The fallout is hard to even imagine. If we do not fundamentally fix the core billing and provisioning systems, there is no business case for 6G, immaterial value to be gleaned from AI, and a clumsy future for ISPs. Wavelow is purpose-built to delete significant portions of the technology stack and set operators up to receive the value of this next era of AI-enabled products and services. The future is bright, and we've never been more excited to be doing this work here and now. Thank you for listening, and now over to Elliot. Thanks, Justin.

Ting's focus now shifts from increasing our fiber footprint, raising capital, and running an ISP to simply running an ISP. This focus will serve us well. In Q3, Ting added 1400 net new subscribers, growing 21% year over year and taking us to almost 50,000 subscribers in total. We also had over 15% year over year growth in completed serviceable addresses in Q3. taking us to 132,000 serviceable addresses for Ting-owned infrastructure. Our partner markets are continuing to ramp up their builds with 60% growth in addresses for Q3 year over year. This brings us to 172,600 total serviceable addresses across all Ting footprints. Revenue for Q3 grew 19% year over year to 15.3 million, driven by a healthy increase in subscribers over the same period. Gross margin in Q3 increased 38% to $11 million year over year and an adjusted EBITDA loss of 5 million. which was $7.1 million less in Q3 of this year compared to Q3 of 2024. In part driven by the reduction in workforce from Q1 of this year, as well as a reduction in sales and marketing spending, as we pulled back to analyze the effectiveness of our tactics used in customer acquisition. We started decelerating our Fiber CapEx spend in Q2 as we began to conserve capital. Again in Q3, our CapEx spend was reduced from just over $12 million in Q2 to $8.2 million in Q3. We expect to finish off some work responsibly in a couple of markets, and then you will see CapEx become near exclusively success-based. I talked about focus. We now move our focus to penetration, churn, and ARPU. We will be putting thought into how to present those metrics going forward, but we are no longer building new organic footprints. The existing scorecard is no longer the right presentation. You will see a new presentation for Q4 earnings in February. Now we'll hear from our new CFO, Ivan Ivanov, who will discuss our financial results in detail.

Thank you, Elliot. Our third quarter results showed strong year-over-year performance for revenue, gross profit, and adjusted EBITDA, reflecting our continued focus on profitable growth. Starting with revenue, total consolidated revenue for the third quarter of 24 increased 6.1% to $92.3 million, compared to $87 million for the third quarter of 23, primarily driven by revenue gains from the think and domains businesses. To Kyle's domains, revenue was up 5.9%, increasing to 64.7 million from 61.1 million the prior year, primarily driven by an expiry auction sale in Q3 of this year. Think grew revenue 19% year-over-year, increasing to 15.3 million from 12.9 million in the same quarter last year, thanks to a 21% increase in subscribers over the same period. WaveLoss revenue decreased 9% to $10.1 million from $11.1 million in Q3 of 2023, reflecting churn from dishes boost subscribers from their peak post-migration in Q3 of 2023, as well as the transition to subscriber-based revenues without the professional services included a year ago. Finally, corporate revenue was up 12% to $2.2 million in Q3 2024 versus $2 million last year. The consolidated gross profit was $22.2 million up 32.4% versus Q3 2023. The increase was driven by year-over-year gross margin gains from the think and domains businesses totaling $4.4 million that were partially upset by declines of $1 million from Weblow and corporate. Consolidated gross profit as a percentage of revenue increased to 24% in Q3-24 from 19% in Q3-23 driven primarily from think and Weblow. Gross profit before network costs for the third quarter increased 9.1% year-over-year to $39.7 million from $36.3 million in Q3 2023. At an efficiency level, gross profit before network costs increased to 43% of revenue from 42% in the prior year. The reduction in network expenses from $19.5 million in Q3 2023 to $17.5 million this quarter reflects a non-recurring asset impairment charge in Q3 of last year. Breaking down gross margin by business, to Kyle's domains, gross margin increased 7.8% to $19.8 million from $18.4 million in Q3 2023. As a percentage of revenue, gross margin for two cows domains increased slightly year-over-year from 30% to 31%. Team gross margin for Q3 increased 38% year-over-year to $11 million from $8 million for the same period last year. As a percentage of revenue, gross margin per tank was 72% in the third quarter of 24, up from 62% in Q3 of last year. Over the past four quarters, we have seen continued increases in TINC's gross margin as a percentage of revenue, as TINC continues to reduce costs while growing top-line revenue. Whoever lost, gross margin decreased 4.6% to $10 million this quarter from $10.5 million in Q3 2023. Gross margin as a percentage of revenue continues to increase for WebLoad. In Q3 2024, it was 99%, up from 95% in Q3 2023, and up from 94% in Q3 2022. Total consolidated operating expenses excluding network costs decreased 5% to $32.2 million, from 32.9 million in Q3-23. The decrease is primarily the result of a 2.1 million reduction in sales and marketing costs, primarily from decreased marketing spend in TING, as well as a 1.4 million in fully amortized intangible assets from the in-home brand and customer relationships. The overall operating expenses reduction was partially offset by increased costs from professional fees, including audit fees and certain other services, in conjunction with our think transformation. As a percentage of revenues, operating expenses declined to 35% in Q3 of this year from 39% in Q3 of 2023. We reported a net loss for the third quarter of $22.3 million or a loss of $2.03 per share compared with a net loss of $22.8 million or $2.09 per share for the third quarter of 2023. The decreased loss was primarily driven by strong growth in adjusted EBITDA. Adjusted EBITDA for Q3 was $8.7 million, up 94% from $4.5 million in Q3-23. Primarily driven by profitability improvements at TING and domains, the adjusted EBITDA breakdown amongst our three businesses is as follows. Adjusted EBITDA for Tukau's domains was $11.5 million, up 5.6% from Q3 of last year, largely thanks to the expiry auction sale. Adjusted EBITDA for TINC was negative 5.1 million compared with a negative 12.2 million in Q3 of 23, reflecting top-lying growth along with continued expense focus. Adjusted EBITDA for WebLow was 3.4 million, down 18.5% from 4.2 million from less one-time professional services and lower subscribers count as explained earlier. The corporate adjusted EBITDA was negative $1.2 million this quarter, down from $1.5 million in Q3 last year. The decrease is primarily driven by lower contribution from the mobile base. Turning to our balance sheet, cash and cash equivalents at the end of Q3 2024 were $75.2 million compared with $39.3 million at the end of the second quarter of 2024 and $110.7 million at the end of the third quarter of 2023. In addition to the $75.2 million, we have $15.9 million classified as restricted cash as part of the ABS transactions in 23 and 24. As a reminder, of the $15.9 million of restricted cash, $11.6 million will sit in a trust account for the duration of the ABS notes. The remaining 4.3 million reflects the cash collections from the securitized assets and it is distributed monthly as interest to the not holders and fees to third parties with the remaining funds coming back to TINC. In the third quarter of this year, we had negative 4.6 million in cash from operations compared with negative 6.9 million in Q3 of last year. We invested $14.5 million in property and equipment, primarily for ThinkFiber, in addition to continuing investment in the Wavelaw and 2Cals Domains platforms. 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. Finally, as of September 30th, 24, our syndicated loan balance for covenant calculation purposes was a net $193 million when factoring in letters of credits and cash on hand of up to $7.5 million, which resulted in a leverage ratio of 3.29 times. We repaid a net $2.5 million on the balance of the loan this quarter, which was partially held down by a large amount of one-time expenses in the quarter. That concludes my remarks. I will now turn it up to Elliot for the closing thoughts.

On TCX adjusted EBITDA guidance year to date, we're at over $22 million, which puts us on track to approximately double in 2024 from the $15.5 million of adjusted EBITDA for 2023. I want to share with outside investors how I think of TCX. I think of the business in two parts, two cows, which includes the domains business, WaveLow, the mobile tail, and the corporate overheads. And then Ting, where the Ting debt is firewalled structurally from the rest of the business. I believe that most or all of the people listening to these remarks have a good understanding of how to think about the two cows part. I want to share how I think about the value of the equity in Ting. At the end of the day, valuing a fiber business is simple but not easy. It is the value of a fiber home, which again is a simple formula. It is the terminal penetration times the average revenue per user times the net margin all divided by churn. With partner homes, we would simply use net revenue or revenue after the lease payment to the partner instead of revenue. Of course, this is the fully realized economic value, not what someone will necessarily pay for it. That could be more or less depending on the circumstances. We have said numerous times, every fiber footprint has three components, capital, construction, and ISP. We are now moving to focusing on only one of those components. This is a change in the operating paradigm for Ting. For the first decade of Ting, we actively worked on all three components. Going forward, we can focus solely on the ISP. In thinking about Ting today, we have 132,000 Ting-owned serviceable addresses and over 40,000 serviceable partner addresses. And we have over half a million serviceable addresses coming online over the next few years from our partner networks in Colorado Springs and Memphis. We have almost 50,000 subscribers. We can now focus on how far we can push penetration, what we can do with value-added services to increase our ARPU, and how we can take our churn and lower it even further. We already perform well in these areas, and pushing these KPIs even further is something that all of us are greatly looking forward to. Most all of the footprints are profitable now and produce enough cash to cover the national costs and marketing costs for new customers. National costs in particular are highly leveraged as this level of national operating expense could support a significantly greater level of customers. With the changes implemented last week, We expect Ting to be around EBITDA breakeven in 2025. This shows the continued operating leverage in this business. On the other side of the ledger, we have roughly $40 million a year in interest payments, and almost every customer we add requires success-based CapEx. Being a Fiber ISP is a fantastic business with an incredible moat. It is also expensive to create that moat. And at the end of Q3, Ting had nearly $80 million in cash in the bank, including ABS reserves. The simplest way to think about the Ting operating paradigm is we will load the existing footprints with new customers, create additional cash and ABS capacity, pointing to a reduction of the generate prep, which is due in August of 2028. We will do all of this while grinding to improve the operating variables that make up the value of a fiber home. That is the linear path. I also expect a very dynamic environment for the hundreds of small fiber ISPs like us in 2025. All of this takes place in the context of TCX, where we have a long history of operating capital light, cash generating businesses. While fiber can never be quite as capital light as a business like domains, Ting today and beyond looks a lot more like the businesses we are used to successfully operating than it has to date. And this lets us get back to thinking like operators and capital allocators in an environment that we are used to. We are all looking forward to this and to 2025. 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 November 14th and look for our recorded Q&A audio response and transcript to this call to be posted to the 2Cows website on Tuesday, November 26th at approximately 5 p.m. Eastern Time. Thank you.