Tucows Inc. Earnings: 55% Earnings Growth; Shares Jump on Tuesday

By Markets Fool.com

Image source: Tucows.

Continue Reading Below

Domain name registrar and network service operator Tucows (NASDAQ: TCX) reported third-quarter results on Monday night. The Toronto-based company beat analyst expectations on both the top and bottom lines. Tucows shares were up 6.4% at 11:15 a.m. EST Tuesday.. The stock has now gained roughly 45% year to date.

Here's a closer look at Tucows' third quarter.

Tucows' third-quarter results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Revenue

$49.1 million

$44.3 million

11%

GAAP net income

$4.7 million

$3.2 million

50%

GAAP earnings per share

$0.45

$0.29

55%

Adjusted EBITDA earnings

$8.6 million

$5.8 million

48%

YOY = year over year. EBITDA = Earnings before interest, taxes, depreciation, and amortization. Data source: Tucows.

Continue Reading Below

What happened with Tucows this quarter?

Mobile services led the way with a 20% year-over-year revenue boost, followed by 16% higher retail domain name revenue. Other services in both the network access division and the wholesale internet tools business saw their revenues edging lower instead.

  • Operating margins landed at 14.8%, up from 11.5% in the year-ago quarter.
  • Management now expects to spend nearly $4 million in 2016 on network infrastructure for its budding Ting Internet operations. That's about $1.5 million more than previously thought, based on lessons learned in the early fiber-rollout process.
  • When the current Ting Internet expansion plans are finished, the company will reach five smaller towns and a total of 85,000 households. Management hopes to achieve a 50% penetration rate in these markets by 2021, based on current trends. The Ting Internet operation is still too small to break out revenue and operating profit figures in these quarterly reports, but the five-year goal is to deliver annual fiber-based gross profits of roughly $42 million.

Tucows is not known for its detailed financial guidance targets. CEO Elliot Noss simply updated his full-year view of adjusted EBITDA profits, which was set at $30 million nine months ago.

What management had to say

As promising as the Ting Internet business may be, Noss does not seem interested in adding any more markets anytime soon. In a conference call with analysts, Noss compared his fiber plans to the stalled implementation of Google Fiber because the two companies appear to be learning similar business lessons right now:

... we're looking at 5 markets and saying, wow, this is plenty for us to really sort of refine our game here. And I think [Google is] looking at the markets they are in and saying the same thing. It's an operationally complex business. I looked at their announcement as in some ways, sort of a positive reinforcement of our view that this was complicated operationally and that the right thing to do was to kind of get okay and then good and then great. So we felt whenever really smart people like they have at Google kind of see something through the same lens as we do, we're quite happy with that.

Looking ahead

Tucows is in a learning phase these days. The Ting Mobile wireless business is already picking up steam, and the Ting Internet operation is expensive now, but should pay back in spades in a few years.

The company is spending freely on sales and marketing, research and development, and infrastructure-related capital expenses. Even so, earnings growth is outpacing the revenue line as the fastest-growing operations come with generous operating margins.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Anders Bylund owns GOOGL. The Motley Fool owns shares of and recommends GOOG and GOOGL. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. The Motley Fool recommends TCX. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.