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Research Note - Tucows Inc. (TC:TSX,$65.11|BUY $150.00 TARGET) Still Firing on All Cylinders; Recalibrating Target Price

Yesterday after market close, Tucows Inc. reported Q2/22 financial results that beat our expectations once again. Tucows posted adjusted EBITDA of $11.7M (+5% YoY), ahead of our estimate of $8.7M and revenue of $83.1M (+11% YoY), beating our estimate of $80.9M.

Tucows Domain Services: The domains business posted $61.1M in revenue (-2% YoY, wholesale -1% YoY, retail -5% YoY) compared to our estimate of $61.5M and $12.1M in adjusted EBITDA (flat YoY), beating our estimate of $11.7M. The quarter puts Tucows on pace to reach its 2022 adjusted EBITDA guidance of $45M, illustrating the reliable cash generation of the business. Domains under management declined <1% QoQ to 24.8M (Figure 2), consistent with trends in the global domains industry in response to demand pull-forward in 2020/2021. Total new, renewed and transferred-in domains came in at 5.4M vs. 5.7M in Q2/21 while the overall renewal rate was 82% (vs. 81% last quarter). We remain encouraged by the pricing power in the domains business given the decline in global domains.

Ting Internet: The fiber business generated $10.2M in revenue during the quarter (+84% YoY, +4% QoQ), in line with our estimate of $10.2M. Adjusted EBITDA came in at -$6.2M, slightly missing our estimate of -$5.1M. Ting Internet ended the quarter with 731K potential serviceable addresses (415K owned and 315K leased) and has completed 104K addresses (85K owned, 18K leased). Ting Internet deployed a record $24.9M in fiber capex during the quarter compared to $14.1M last quarter. Subscribers grew 9% QoQ to 30K at a $112/month ARPU (Figure 4). Our implied take-rate for the quarter came in at 29% compared to 28% in Q1.

Yesterday morning, Ting announced that it has secured up to $200M in financing from sustainable infrastructure investment firm, Generate Capital. The financing is in preferred stock and includes $60M upon closing and $140M based on operational milestones at a 15% coupon and six-year term. The preferred shares only convert to equity in the event of a default. The $200M should translate into 130K homes passed or $17/share to our target assuming $3,000/pass. Ting and Generate will also enter into an Equity Capital Contribution Agreement providing up to $400M in additional capital, where Generate will fund the equity and buildout of new fiber networks that Ting will serve as the anchor tenant for. Tucows was also able to extend its existing credit facility to June 2024 and reorganize the facility to exclude Ting Internet; this means the fiber EBITDA losses will not be included in the future covenant calculations. CEO Elliot Noss commented that investors should expect Ting to pursue additional debt to continue with the capex momentum.

Wavelo: In Q1, Wavelo posted $9.0M in revenue (+31% QoQ) and $3.9M in adjusted EBITDA, compared to our expectations of $7.2M and $1.1M respectively. This puts Wavelo ahead of schedule for its full year guidance of $3-6M in EBITDA. The Company is concluding its professional services work with DISH and expects the business to become more predictable and higher margin as it moves to a subscription model. The DISH migration was again not a focus in Q2, but Wavelo CEO Justin Reilly outlined that migrations will ramp significantly in H2/22.

20220810 - M Partners - TC - Q2 Results
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