When Tucows (NASDAQ: TCX) reported its third-quarter results recently, the company's domain registration business posted healthy growth numbers thanks to its acquisition of eNom earlier this year. On the conference call, management indicated that the integration of eNom is proceeding smoothly, and reiterated its full-year adjusted EBITDA guidance.
While its domains segment is a reliable cash-generator for Tucows, it's also a mature business with modest organic growth prospects. For investors, the more interesting parts of the call were updates on the Ting-branded businesses in Tucows' network access segment: Ting Mobile and Ting Internet. And although Ting Mobile is still growing at healthy rates, it's Ting Internet that continues to make Tucows look like a stock with real home-run potential.
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Good customer growth and retention for Ting Mobile
Ting offers its customers low-priced mobile service with an average monthly bill of just $23 per device. Ting finished Q3 with 171,500 accounts and 281,000 devices, up from 170,000 accounts and 278,000 devices last quarter. Growth in accounts was the result of 4,500 new subscribers and the loss of 3,000 existing customers. That high customer churn is a byproduct of Ting acquiring 22,000 customers in Q1 from another provider called RingPlus that ceased operations. CEO Elliott Noss said (transcribed by Seeking Alpha): "We expected significant churn with any involuntary migration, and this base was significantly more churn-y than most. I had said back in Q1 that I'd hoped to hang on to 5,000 to 7,000 of them, and that is, in fact, exactly where we are now."
Let's take a look at Ting Mobile's numbers over the last several quarters.
There are two positive trends happening here. First, the year-over-year Q3 growth in accounts and devices were roughly 17% and 20%, respectively. Even if you exclude the RingPlus acquisition, organic account growth would have been about 13% year over year. Ting is continuing to put up healthy numbers in a mature industry where each additional customer comes at a competitor's expense. Additionally, the 4,500 new subscribers in Q3 represented one of Ting's best quarters for organic growth. Noss said, "Our strong ... adds through three quarters of 2017 continue to give us confidence that this is still very much a growth business, of course inside a flat industry."
Secondly, the company's churn rate -- the percentage of customers who leave Ting each month -- has been decreasing on a year-over-year basis since late 2016, when the company reduced data prices. Excluding the acquired RingPlus customers, Ting's monthly churn for Q3 was 2.49%, down from 2.8% last year. The company says that puts it in a great position to hit its churn goal of 2.5% or lower for full-year 2017.
Ting Internet is preparing for significant expansion
Tucows' long-term strategy is to use the cash generated from its domains and Ting Mobile businesses to fund the expansion of Ting Internet, which provides fiber internet access to a handful of smaller towns.
On the conference call, management said that in Ting Internet's first three markets -- Charlottesville, Virginia; Holly Springs, North Carolina; and Westminster, Maryland -- it has 13,100 "homes passed" (homes where fiber is now available), and roughly 3,900 customers. The company said customer sign-ups and pre-orders remain in line with expectations. That's crucial, because Tucows' model for Ting includes some fairly aggressive goals. The company expects 20% uptake in the first year of launching service in a new community, growing to 50% within five years.
Next year, Tucows will begin connecting customers in its other two announced markets: Sandpoint, Idaho, and Centennial, Colorado. In all, these first five Ting towns will provide Ting with 85,000 total serviceable addresses once its fiber buildout is complete. By 2023 or thereabouts, with each customer expected to contribute roughly $1,000 per year in gross margin, Tucows could realize $42.5 million in annual gross margin from Ting Internet alone. For perspective, Ting Internet contributed gross margin in 2016 of just $1.5 million.
Though no new Ting towns were announced this quarter, Noss said they are looking at opportunities with various communities all the time, including a recent request for proposal from the city of Madison, Wisconsin.
The company also remains an active bidder for Burlington Telecom, a publicly owned fiber network in Burlington, Vermont. The company recently increased its offer for BT to $32 million, and if successful, this acquisition would add another 16,000 serviceable addresses.
Ting Internet may be just getting off the ground, but it remains Tucows' longest runway for growth. And with demand continuing to meet expectations, next year should bring a significant increase in paying customers and homes passed as Ting ramps up activity in all five of its initial markets. Noss has stated that over the next five to 10 years, Tucows' business should become overwhelmingly dominated by Ting. The continued subscriber additions from Ting Mobile and the plans for rapid expansion of Ting Internet are certainly pointing in that direction.
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