Tucows CEOs Discuss 1Q 2012 Results - Earnings Call Transcript

Tucows, Inc. (TCX)

1Q 2012 Earnings Call 5:00 p.m. ET

May 8, 2012

Executives

Elliott Noss – President, CEO and Director

Michael Cooperman – CFO

Analysts

Brett Hoselton – KeyBanc Capital Markets

Saul Ludwig – NorthCoast Research

Ravi Shanker – Morgan Stanley

Pat Nolan - Deutsche Bank Securities

Presentation

Operator

Good afternoon ladies and gentlemen. Welcome to Tucows Inc.'s First Quarter 1012 Conference Call. Earlier this afternoon Tucows issued a news release reporting the financial results for the first quarter. That news release and the financial statements are available on the company's website at tucowsinc.com under the investors heading.

Please note that today's call is being broadcast live over the internet and will be archived for replay both by telephone and via the internet beginning approximately 1 hour following the completion of this call. Details on how to access the replays are available in today's news release as well as Tucows’ website.

Before we begin let me remind you that matters the company will be discussing include forward looking statements and as such are subject to risks and uncertainties that can cause the actual results to differ materially. These risk factors are described in detail in the company's documents filed with the SEC.

Specifically, the most recent report on form 10K and form 10Q. The company urges you to read its security filings for a full description of the risk factors available for this business.

I would now like to turn the call over to Tucows’ President and Chief Executive Officer, Mr. Elliot Noss. Please go ahead Mr. Noss.

Elliott Noss

Thank you, Operator. With me is Michael Cooperman our Chief Financial Officer. I'll begin today with a brief overview of the financial and operational highlights for the quarter. Mike will then review our financial results in more detail. Then I will return with some concluding comments before opening the call up to questions.

Q1 was another solid quarter for Tucows and our results again, underscore the growth consistency and reliability in our business. We saw growth across all the areas of our business and generated strong cash flow from operations. We recorded our 8th consecutive quarter of record revenue at $27.5 million, up 22% from the same quarter of last year. Cash provided by operating activities was $2.1 million, up significantly, from $0.8 million for Q1 last year.

While already a strong quarter, I will note that Q1 did benefit from items that while typical in the course of a year stand out in the course of a quarter. An unusually high level of sales of gems from our domain portfolio and marketing funds we receive from domain registries that were front-end loaded.

Importantly, Q1 was quarter in which you can really see the leverage in our business. Growth in revenue and gross margin far exceeded growth and operating expenses. Typically, we look, for at least $0.50 of every of incremental dollar in billed gross margin to drop to the bottom line. This year, our leverage was much better.

Before I walk through more highlights of the quarter, I will note, that we changed the way in which we classify the different sources of revenue in our disclosure. Beginning this quarter, we are breaking up revenue and gross margin by wholesale, retail, and portfolio. We believe this realignment better reflects the manner in which revenue is generated and the way in which management currently assesses the business.

More specifically wholesale, which includes the OpenSRS Domain Service and other value-added services, which are, email, digital certificates and ISP billing software. Also, now includes revenue generated from the Domain Name Expiry Stream. These were previously included in YummyNames.

Retail includes Hover, as well as the current Ting offering.

Portfolio includes the resale names from our domain names portfolio and advertising revenue from those names. Both of which, were previously included under YummyNames, as well as our two advertising supported websites, which were previously discussed as Butterscotch.

Beginning with wholesale, Q1 was another solid quarter for domain service transactions which up 21% from Q1 of last year to another record at more than $2.4 million.

Domain service revenues increased 19% year over year. Growth in, both, new registrations and renewed registrations, was strong, at 24% and 21%, respectably. We, also, saw healthy sequential growth in overall transactions volume at 15%. Renewal rates continue to be strong and take up slightly at 76%, remaining above the industry average.

Total domains under management at the end of Q1 were up 9% from the same point last year and surpassed the 12 million mark for the first time. As I mentioned a moment ago, revenue generated by sales and advertising from our Domain Expiry Stream, is now being included in our wholesale numbers.

Our Expiry Stream business had a very good quarter in Q1. Sales of bulk direct-navigation names almost doubled from Q1 of last year, benefiting from the addition of a secondary partner. Advertising revenue from park domains, from both expiry and portfolio, continue to improve.

Moving to retail, Hover revenue increased more than 30% year-over-year and almost 10% sequentially. Hover continues to show excellent customer growth and strong renewal performance. New transactions, which include new domains, transfers and email accounts experienced solid growth of 30% year over year and 27% sequentially. Renewal rates continue to impress. Our great support and simple, useful website are both amplified by our customers through social media.

We continue to attract new customers away from our competitors. The ratio of transfers-in to transfers-out climbed even higher then Q4, reaching well over 5 to 1. Given our role as the largest wholesaler, we well understand how impressive that transfer ratio is.

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