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.
|Want to be the first to know about interesting Technology investment ideas? Sign up to receive the FREE Streetwise Reports' newsletter.||Subscribe|
- Doresa Banning wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor.
- From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.
Disclosures for M Partners, Tuscows Inc., May 11, 2023
The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. Disclosure codes are used in accordance with IIROC Rules 3608, 3609, and 3616.
Description of Possible Disclosure Codes
1. M Partners or its affiliates collectively beneficially own 1% or more of any class of equity securities of the company which is the subject of the research report.
2. The analyst or any associate of the analyst responsible for the report or public comment has a long or short position in the company.
3. M Partners or a director or officer of M Partners or any analyst provided services to the company for remuneration other than normal investment advisory or trade execution services within the preceding 12 months, (may seek compensation for investment banking services from the company herein within the next 3 months).
4. The director, officer, employee or research analyst is an officer, director or employee of the company, or serves in an advisory capacity to the company.
5. The analyst has viewed the material operations of the company. We define material operations as an issuer's corporate head office and its main production facility or a satellite facility that is representative of the company's operations. Unless otherwise disclosed herein, the analyst’s travel expenses were not paid for or reimbursed by the company.
6. M Partners provided investment banking services for the company during the 12 months preceding the publication of the research report
7. The analyst preparing the report received compensation based upon M Partners investment banking revenues for this issuer
Dissemination M Partners has no further disclosures to make for any issuers mentioned in this report for which disclosures are not provided above. All final research reports and morning outlooks are disseminated to institutional clients of M Partners simultaneously in electronic form. Hard copies will be disseminated to any client that has requested to be on the distribution list of M Partners. Reproduction of this report in whole or in part without permission is prohibited.
Research Analysts The Research Analyst(s) who prepare this report certify that their respective report accurately reflects his/her personal opinion and that no part of his/her compensation was, is, or will be directly or indirectly related to the specific recommendations or views as to the securities or companies. M Partners compensates its research analysts from a variety of sources and research analysts may or may not receive compensation based upon M Partners investment banking revenue.
Member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund Participating organization of the Toronto Stock Exchange and the TSX Venture Exchange.