Tucows Inc. (TC:TSX; TCX:NASDAQ) posted a Q1/23 that missed expectations and led M Partners to lower its target price and near-term financial estimates on the Internet services and telecommunications firm, reported analyst Maxwell Carr in a May 11 research note.
M Partners dropped its target price on Tucows to CA$90 per share from CA$110. Even with the lower target, the potential return for investors is still compelling, at 151%, given the company is currently trading at about CA$35.92. Tucows remains a Buy.
"Long term, we trust that the team at Tucows will be able to rein in costs, and as a result, we see long-term value in the equity," Carr wrote.
Total Revenue a Miss
The analyst reviewed the quarterly results, overall and for each of Tucows' three businesses individually, and provided M Partners' revised near-term financial estimates for each.
Total Q1/23 revenue was US$80.4 million (US$80.4M), below M Partners', expected US$82.1M. Similarly, adjusted EBITDA fell short, at US$3M versus US$6.3M.
M Partners lowered its overall forecasts to:
- Q2/23 Revenue: US$81.9M, from US$82.4M
- Q2/23 Adjusted EBITDA: US$1.3M, from $1.9M
- FY23 Revenue: US$327.9M, from US$330.8M
- FY23 Adjusted EBITDA: US$3.2M, from US$12.8M
Inherent Upside Potential
The bright light for Tucows during Q1/23 was Wavelo, its builder and supplier of telecom software.
"Wavelo was a welcomed surprise in the quarter as we saw revenues meet our expectation and adjusted EBITDA turn positive sooner than we had anticipated," Carr pointed out.
Revenue was US$7.3M, and adjusted EBITDA was US$800,000 compared to M Partners' estimates of US$7.5M and (US$1.9M), respectively.
M Partners' increased its estimates for Wavelo to:
- Q2/23 Revenue: US$8M, from US$7.5M
- Q2/23 Adjusted EBITDA: US$0.5M, from (US$1.9M)
- FY23 Revenue: US$31.4M, from US$30M
- FY23 Adjusted EBITDA: US$1.9M, from ($5.2M)
"We see Wavelo as being a key component to the future of Tucows," Carr commented. "We see a tremendous upside to the value of Tucows' equity if the team can prove they are able to meet its cost guidance and grow Wavelo as expected."
Strong but Leveraged Asset
Tucows Domains, a domain registrar, missed M Partners' estimates for Q1/23 revenue and adjusted EBITDA: US$59.2M versus US$60.2M and US$10.3M versus US$11.4M, respectively.
"The domains business remains a strong asset; however, it has been leveraged to capacity and risks a shrinking topline and eroding adjusted EBITDA margins," Carr wrote.
M partners lowered its estimates for TC Domains to:
- Q2/23 Revenue: US$58.7M, from US$59.8M
- Q2/23 Adjusted EBITDA: US$10M, from US$11.4M
- FY23 Revenue: US$235M, from US$237M
- FY23 Adjusted EBITDA: US$40.2M, from US$45.2M
Buildout Strategy Risky
Revenue of Ting Internet, Tucows' fiberoptic Internet provider, was a beat, coming in at US$11.9M against M Partners' projection of US$11.5M. Adjusted EBITDA, though, was not. It was (US$9.3M), and M Partners expected it to be (US$5.2M).
Carr explained that "the quarter saw an increase in the cost per new fiber addresses passed, at US$4,100, up from US$3,300 in Q4/22.
For Ting, M Partners now expects the following:
- Q2/23 Revenue: US$12.2M, from US$11.4M
- Q2/23 Adjusted EBITDA: (US$11M), from (US$8.4M)
- FY23 Revenue: US$50.6M, from US$50.8M
- FY23 Adjusted EBITDA: (US$44.1M), from (US$34.8M)
"Tucows is taking a big risk in its buildout strategy, but we believe [CEO] Elliot [Noss] and his team have the tenacity and skill to pull it off," wrote Carr.
Financings and Cash
During Q1/23, Tucows drew US$30M against its preferred share facility.
It ended the quarter with US$11.8M in cash, a drop from US$23.5M in Q4/22.
After Q1/23, Tucows secured US$239M through asset-backed financing and will use the proceeds to keep expanding its fiberoptic Internet network.
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Disclosures for M Partners, Tuscows Inc., May 11, 2023
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