Elliot Noss - President & CEO Michael Cooperman - CFO.

Hubert Mak - Cormark Securities.

Welcome to Tucows' Second Quarter 2015 Conference Call. Earlier this afternoon, Tucows issued a news release reporting its financial results for the second quarter. That news release and the financial statements are available on the Company's website at tucows.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 one hour following the completion of this call. Details on how to access the replays are available in today's news release.

Before we begin, let me remind you that matters the Company will be discussing includes forward-looking statements and as such are subject to risks and uncertainties that could cause the actual results to differ materially.

These risk factors are described in the Company's documents filed with the SEC, specifically the most recent reports on the Form 10-K and Form 10-Q. The Company urges you to read its security filings for a full description of the risk factors applicable for its 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..

Thank you, operator. And thanks everyone for joining us today. With me is our Chief Financial Officer, Michael Cooperman. As per our usual format, I'll begin today's call with an overview of the financial and operational highlights for the quarter. Mike will then review our financial results for the quarter in detail.

And I'll return with some closing thoughts before opening the call to questions. Continuing growth in Ting Mobile complimented by ongoing solid performance from our domains business contributed to another quarter of a record consolidated revenue and just shy of $43 million which was up 21% from the second quarter of last year.

We continue the benefit from the operating leverage in our business which drove further expansion of our gross margin exclusive of the portfolio to 29% from 26% in Q2 of last year.

Growth in revenue and operating leverage continues to be reflected in our profitability with adjusted EBITDA of Q2 increasing 64% year-over-year to 5.4 million bringing our total for the year-to-date to 12.3 million. Net income per share was $0.21 up from $0.12 in Q2 last year.

As I mentioned a moment ago Ting Mobile saw continued growth in Q2 and a bit of rebound, averaging over 10,000 accounts and 15,000 devices bring our total at the end of the quarter to more than 113,000 accounts and a 178,000 devices.

You will recall that last quarter our customer support team was struggling to keep up with call volume and we shut down all marketing and promotional activities until we get back to the level of service that has defined and propelled the Ting brand.

That was the state we were in 2/3rds of the second quarter while we’re still not at levels that we are satisfied with. We had caught up sufficiently to the increased demand brought up by changes in Sprint qualities that by the end of May we started marketing the service again and by the beginning of June we’re at full throttle.

The sensor piece of that effort was a referral promotion letting our customers know there has never been a better time to bring friends to Ting and increasing the reward for doing so.

In the end June was our second largest month of gross adds ever following this past December, it brought us back over the 10,000 net add benchmark that we had slipped below briefly with the events of Q1 and hope to stay above in quarters' ahead.

Coming into the second half of this year, we have a great opportunity with Ting Mobile to get additional returns on incremental operational improvement. We have clear consistent requirements and processes now for Sprint devices to come to the service, well it is more complicated than it was, at least it is settled.

We have a choice of two nationwide networks and we can now accept a far greater of a percentage of owned devices.

We have a much better handle on the drivers of customer support interactions with the redesign of the business processes and we have a staffing plan to keep us out in front it, perhaps most importantly we now have a greater abundance of prospects to convert.

In our first three years just about any improvement we made to our offering or our conversion produced relatively small returns while very few people knew who we were. With consumer reports rating in December the interest in our fiber initiative over the past couple of months and a growing customer base spreading the words in their friends every day.

We appear to have muscled our way into millions of daily discussions of cell phone providers. We see it in our website traffic and our support interactions both of which reached all-time highs in Q2. What that means to us is that we can get significant returns on improvements to our user experience, before, during and after activation.

We have a long backlog of screws to be tightened on our website in our programs that generate nurture leads and in our sales and support processes and we see those as ways to turn more of this demand into customers.

Meanwhile the key metrics of the Ting Mobile business remained consistent, churn is between 2.5% of our base each month, that is of course included in the next 10,000 we’re adding each quarter, our customer spend about $35 a month, gross margins are around 50% and cost per acquisition continue at under a $100.

As you can see the numbers and the growing base are all showing up quite clearly in our strong results. Ting Internet launched in Q2 in Charlottesville, Virginia. We lit up our first beta gigabit customers in May allowing customers to start signing themselves in early June and they are operating at or near capacity ever since.

Meanwhile we’re rapidly building up fiber network to cover the entire city and have already reached over 3000 serviceable addresses.

In our other launch market Westminster, Maryland where Citi [ph] is building the network and playing the dual roles of network operator and service provider, we co-hosted a fiber lighting ceremony in late June and expect to start signing up customers in mid-August we continue to receive praise for our unique public private partnerships there, the National Association of Telecommunications Officers and Advisors or NATOA recently recognized Westminster and Ting as innovative partnership of the year as part of their 2015 community broadband awards.

At this stage our focus is on optimizing our processes from network build-out in Charlottesville to scheduling and reforming a high volume of customer installs to tracking and managing customers actual internet usage. We’re of course also identifying opportunities to improve the user experience and minimum [indiscernible] support.

All of that is going well. Our costs so far seem to be in-line with our assumptions and we’re increasingly confident that we can scale this service.

Moving to the domain of services side of the business performance was in-line with expectations solidly in Q2 especially outside of the declining expiring stream business with particularly promising results in email. Registration on OpenSRS were up 2% driven by an outstanding renewal rate of 79%, once again our highest renewal rate outdoor [ph].

Perhaps even more impressive that included a 70% of new gTLDs with a large percentage in their first year of renewal.

We added 52 more gTLDs in Q2 and by the end of the quarter 2100 resellers had registered at least one new gTLD up from 1900 at the end of Q1 and in addition to the promise of incremental revenue from these resellers this adoption across more services ultimately fosters key relationships and secures the revenue on our core gTLDs.

OpenSRS continue to find growth in all corners of the world in Q2, new registrations from outside North America and Western Europe were up 16% year-over-year and represented a new high of 25% of all new registrations in the quarter.

We’re also particularly pleased with some growth coming back to our email business primarily the result of Google no longer supplying Gmail to ISPs. Long time investors will remember that years ago we lost big pieces of business Google as they got into this market. They have now effectively exited.

Hover a retail domains business continues it's strong growth with increases in both revenue and gross margin of over 18% year-over-year and growth from the customer base of 14%.

We launched an exciting new initiative in Q2 called Hover Connect that will enhance the customer experience and has the potential to ultimately drive more customer acquisitions through partnerships.

Hover Connect allows our users to easily connect their Hover domains to their favorite web services without DNS modifications, the users simply choose it's which site building service he is using or she is using from a menu of popular choices of Hover and Hover automatically points the domain to the appropriate website.

It highlights one of Hover's greatest competitive advantages that we do not attempt to lock users into our own site building or hosting service. It also simplifies the trickiest aspect of the domain name experience, the link to the webhost.

In addition to improving the Hover experience we’re hopeful this feature will be appealing to the site building services as they consistently identify connecting with domain registration as perhaps their greatest pain point. I would now like to turn the call over to Mike to review our financial results for the quarter in greater detail.

Mike?.

Thanks, Elliot. As Elliot stated at the outset the second quarter of 2015 was another record in terms of revenue at 42.9 million, an increase of 21% from 35.6 million in the corresponding quarter of last year. Cost of revenues before net for the costs were 28.3 million up 14% from 24.7 million in Q2 of last year.

Gross margin before network costs was $14.6 million up 35% from $10.9 million. As a percentage of net revenue, gross margin before network costs increased to 34% from 30%. Looking at the two major components of gross margin for our business, gross margin for Domain Services grew slightly to 7.7 million from 7.6 million from Q2 last year.

As a percentage of revenue, gross margin for Domain Services was essentially unchanged from Q2 of last year to 28%. Gross margin for Network Access for Q2 increased by $3.7 million or 115% to $6.9 million from 3.2 million primarily the result of the contribution of the much larger Ting Mobile customer base relative to a year ago.

Gross margin as a percentage of revenue for Network Access expanded to 45% from 39% in Q2 of last year as a contribution from services continue to grow relative to that from devices which are sold more or less at cost.

Breaking down gross margin for Domain Services into it's component pieces, gross margin for the wholesale channel decreased by a 134,000 or 2% to 5.4 million from 5.5 million.

For Q2 of last year this small decline in margin is primarily due to the timing of certain marketing initiatives undertaken by both Tucows' and our vendors in 2014 which have either been modified or scaled back this year. As a percentage of revenue gross margins for the wholesale channel was unchanged from Q2 last year at 23%.

Gross margin for retails services increased by 257,000 or 18% to 1.7 million from 1.4mi for Q2 of last year as Hover continues to successfully add customers and grow sales to existing customers. As a percentage of revenue, gross margin for retail services was unchanged during the Q2 of last year at 56%.

Gross margin from portfolio services decreased by 35,000 or 5% to 641,000 from 676,000 in Q2 last year. Turning to costs, network expenses for Q2 increased by 468,000 or 35% to 1.8 million from 1.3 million for the same period last year.

This increase is primarily the result of the additional cost we incurred as a result of our now providing high speed internet access, internet hosting and network consulting to customers as a result of our BRI acquisition.

Total operating expenses for the quarter were just under 900 million, an increase of 1.5 million or 20% from 7.5 million in Q2 of last year. The following factors accounted for the bulk of this increase. First operating for Q2 of this year included a $900,000 provision for over achievement bonus purposes.

We took this step and it now appears that we will exceeded our adjusted EBITDA target for 2014 and this will likely be payable based on our 2015 bonus plan. Second, workforce related expenses were also 400,000 higher than Q2 of last year primarily due to servicing our much larger Ting Mobile private base.

Third, our marketing spend increased by 200,000 largely as our [indiscernible] acquired T-Mobile subscribers.

Fourth, credit card processing fees, facility cost and supplies increased by 200,000 when compared to Q2 last year primarily to support the growth of Ting Mobile and finally as a global company we’re impacted by foreign exchanges resulting from the valuation and settlement of our forward contracts as well as the impact of the revaluation on our non-U.S.

dollar designated assets and liabilities. As we have described in more detail in our 10Q the net impact of foreign exchange for the second quarter when compared to the second quarter of last year resulted in our recognizing an additional net loss of a $100,000.

These increases were partially offset as an impairment of indefinite [indiscernible] intangible assets and charges in the second quarter of this year was 289,000 lower than in the second quarter of last year.

In the second quarter of last year during our normal renewal process it was determined that certain domain names we acquired in the June 2006 acquisition of Mailbank should not be renewed and we’re allowed to expire.

In addition, amortization costs were 167,000 lower in Q2 of last year as a result of the acquisition of IYD being fully amortized last year.

As a percentage of revenue, total operating expenses were unchanged from Q2 of last year at 21%, net income for the second quarter of 2015 increased to 2.3 million or $0.21 per share from 1.3 million or $0.12 per share for the same period last year.

Turning to the balance sheet, cash and cash equivalent at the end of the second quarter this year increased by 1.6 million to 15.3 million when compared to the second -- to the end of the first quarter of this year. During the quarter we generated 2.2 million in cash from operating activities as well as 300,000 from exercised stock options.

These sources of funds were partially offset by our using 490,000 to repurchase shares under our ongoing share buyback program and our investment of 1.1 million in property and equipment.

Included in these additions to property and equipment is an amount of 800,000 that we invested during the quarter primarily in expanding our fiber footprint under the Ting Internet [indiscernible].

Deferred revenue at the end of the second quarter was 74.3 million up 1% from 73.6 million at the end of the second quarter last year and up 1.3 million from 73.3 million at the end of the first quarter of this year. With that I would now like to turn the call back to Elliot..

Thanks, Mike. I want to take this opportunity to set this stage for how investors should start to think about Ting Internet over the long term. Fixed internet access is not a get rich quick business, it is a get rick slow and for a long time business. As I discussed earlier, we were currently in two markets, Charlottesville and Westminster.

What we have been doing in these two markets and primarily testing our core hypothesis. Our build cost in-line with our assumptions, our take-up in-line with our assumptions, able to handle home installs in a way it's satisfactory to us. We are able to provide core back office systems in a way that’s satisfactory.

Think of 2015 as us getting a sense of whether we should be in this business for the long term. At this point we’re both comfortable and excited that the answer is us. We are now working through the pipeline of new cities and towns for 2016. We would guess that we will be in five or six new markets next year.

The question I get asked frequently is how we determine which markets to go into. We have a number of criteria, a lot of which many of you exceed publically as published by Google in their Google Fiber initiative. A lot of these criteria are around things that you expect like population density and demographics.

Others are more specific to us like finding the market sizes both on the low and high end and finding the right mix of homes, businesses and multi-dwelling units or MDUs. We view 2016 as a year in which we learned how to best select markets.

Accordingly some of our choices maybe in the nature of experiments and that experimentation would take place again around some of our core assumptions. At this point we are quite comfortable that Ting Internet has real material long term upside potential and importantly well bounded downside risk.

We’re also getting more comfortable with some of our core operating assumptions. Ting Internet unlike Ting Mobile is a very local business and as a result these assumptions will have significant variability market to market.

That said at this point we’re benchmarking the cost of building and connecting a home at roughly $2500 and the gross margin from connecting a home to be roughly a $1000 per year.

Those benchmarks assume a 20% take up rate in the first year and a 50% take up rate over 5 years consistent with what a number of a fiber to home initiatives are currently seeing.

And these also assume the existence of a Ting TV service which we do continue to hope to be in market with by the end of this year or the first couple of quarters of next year.

In addition when looking at the pipeline for 2016 it's our guess that the majority of deals we do will be deploying our own capital while the rest will be public, private partnerships or public open assess networks.

Finally while we do expect to start to deploy serious capital to 2016 we don’t think we will begin to come close to a level of capital deployment where we need a material to look at our sources of capital or our strategy around returning capital to shareholders. We’re now through half of the year.

We have clearly had a strong first half and now feel it appropriate to increase guidance for 2015 from $20 million of EBITDA to $25 million of EBITDA. This is a strong performance and one that bodes well for the future. In many ways their current performance reminds of 2012 - 2013 when we were investing in Ting Mobile.

We were able to continue to grow the business well investing in and launching a completely new revenue stream in a way that made the investment seem invisible and painless to investors. Right now and for the next step we were investing in Ting Internet and much like last time, the investors who recognize this are likely to be well rewarded.

And with that I would like to open the call to questions..

[Operator Instructions]. And our next question comes from the line of Hubert Mak from Cormark Securities. Your line is open..

Elliot, on the Ting Mobile business [indiscernible] platform Sprint and obviously looks like you had something like return to normalcy in the quarter, can you sort of based on what you’re seeing now, what are you, can you sort of extrapolate what kind of run-rate you think is going to be for Q3 and Q4, because obviously you had 10,000 this quarter and two third of it you didn’t have sales and marketing so can you sort of give us a little bit of better guidance on this?.

I think that right now Q3 probably looks similar to in the range of Q2, Q4 is always a funny one because it's got the Christmas season in it. I think that you’re going to see us, we’re dealing with still changes in the way we have had to do business that have caused the customer service performance to not be what it was.

So yes there was a chunk of Q2 where we weren't marketing and yes we have started to turn it back on but if you gave me a choice between no marketing and customer service where we want it to be or full marketing and customer service performing at a mediocre level I will take the former over the latter.

The Ting is very, very driven by the customer experience and so we’re pretty heads down around that and so we see that come clean, we’re not trying to push too hard..

So I want to clear this, so the sales marketing is back I guess to where you were before?.

Roughly..

Okay.

And this service level you’re obviously had the capacity right now so you’re also at a 100% right now?.

So what I'm saying is that hold times are too long the customer service experience is not what we want it to be and we think that impacts conversation and referrals.

So we think that’s still a drag and that’s primarily because the changes that we have had to make so both in the changes in the Spring supply chain and new policies and the introduction of GSM have changed our customer service ratios.

We had to internalize a lot more of the supply chain and it's just changed the what I say customer service ratios you know the amount of customer service we have to put into conversion which is one thing we look at but relative to the number of the customers is other thing we look at.

So those ratios fundamentally change and we have to catch up to them..

And I saw your comment on the GSM impact, whether are you seeing attraction on that side and do you still see a potential pent-up becoming..

So I don’t know about pent-up we certainly are signing up a lot of people on the GSM side, we’re making a conscious decision not to provide break outs between the two services but I'm comfortable saying that GSM is lot of people thinking about..

And this question is for Mike, [indiscernible] what the contribution -- on revenue side of the [indiscernible]..

We haven't started breaking out any of those numbers yet, what I can tell you is just to reiterate what Elliot has said, we do not believe that the internet side will have a material impact one way or another on our results for 2015..

Not on the top line, Hubert I mean when I say that it definitely it should do in the quarter but it's not a big business..

And then cost related, and as I look for the cost offering expenses here.

Just a little bit bump up here, my guess is you have got the full contribution of delivery so can you maybe just talk about the cost structure like whether this is a good base level and then how do we see this pan out for about three year going out as you just talk about that your service level, our thing is not at what you wanted as well as your investment going into--.

Sure. We’re going to be investing a little certainly through the next couple of quarters and going forward but I want to be clear on the level of investment. One of the things we used to talk about you know the metrics we used to consistently put out is that we would spend less than $0.50 of every incremental gross margin dollar on operating expenses.

That still, we don’t talk about that on the calls anymore, we don’t talk about that probably in the few years. But we’re still seeing leverage in the business. So we’re going to take some of the margin expansion both at a gross and net level that you’re seeing and we’re going to sort of hopefully add capacity to businesses to grow.

I think you will continue to see you know sort of slight increases in those OpEx levels through the second half of the year and it will consistently be south of that kind of $0.50 threshold to 50% threshold that we used to talk about. So in other words you’re going to continue, you should continue to see increasing both net and gross margins..

And then a quick one here on the tax rate, it was a little bit, it looks like it has increased a bit this quarter, so I think it gives you an idea where do you think the tax rate is going to be for the rest of the year or next year?.

The reason to the increase in the tax rate is simple. Ting is obviously operates in the U.S. and we now have U.S. state taxes to pay, that’s the reason why the tax rate is going up and the tax rate I would anticipate the tax rate in Spain the 36% range certainly for the balance of this year..

Okay. And then lastly, you’ve guided an increase in your guidance here.

What is the assumption around this? Am I correct in assuming that’s [indiscernible] somewhat you have talked about too before?.

No, I think as you’re seeing a little bit investment there. The whole reference there, you know we’re investing in that business. it's a place where we’re building out a whole new set of competencies. So we’re investing in that business..

Okay, so the assumption that there will be initial losses?.

Yes again that’s why I was drawing the reference to mobile you know where we invested in that business. We didn’t really break that out until we were probably six or eight quarters in and then we started to give you a little bit of visibility as that stock settles down. You know you will probably see a similar some story and a bit of disclosure here.

But we’re investing in that business so that 25 million number subsumes that investment sort of payments..

Our next question comes from the line of [indiscernible]. Your line is open..

Can you guys give a little color on what net adds from T-Mobile were in the quarter and maybe how you expect that relationship to shift to ramp in the coming years?.

Again we don’t want to break out the splits between the two, I think we’re satisfied or comfortable, GSM is now just a solid part of the business. If you go through our purchase path you will see that we really let the choice of the phone that you have in your hand drive in a lot of respects which network you’ve that phone [ph].

Over time we may start to see geography, figure into some of that as with our customers help get smarter in particular markets. You guys are in Chicago which does have a particular profile for into one network versus the other. So I think you will kind of see that continue to evolve.

We’re not seeing, you know when you’re talking about the relationship but I don’t know if this is what you’re referring to but it certainly what brings to mind for me, we’re not yet seeing from our partners for instance from either of our partners willingness to let us do some of the things that Google is doing for instance.

But we will keep pushing, so I don’t know if that’s sort of the way you’re thinking or if there is other direction there..

And then just quickly, I know you mentioned that these were broadly the same in the quarter but I'm curious in terms of sort of trend, are you seeing any changes in the cost required a customer or in churn?.

The short answer is no, stock is staying in-line.

We’re always trying new things on the customer acquisition side and so we have got few things we’re playing with, hopefully they will be right but not that I will sharing some of them with you next quarter, but hopefully it not only be right but it has actually worked a little bit and I will sharing them with you next quarter.

We’re not seeing any material changes there. I would qualify that just one little bit, where in Q2 where we run a promotion like we did with our boast to the referral program which was for very sort of time box limited period. You do see a little bit of an uptake there, but that’s very much sort of by choice and in a bound time period..

And our next question comes from the line of [indiscernible]. Your line is open..

So just to make sure I understood what you’ve already said that you it appears as though even though the internet business, the fiber business will take some capital, you still intend to continue to be able to buyback stock on some sort of schedule?.

So, there are two things there. One we continue to see value and there is no change in our view that returning capital is strategic, also no change every quarter we make a decision as to what tactics we might use so that’s over the market versus Dutch and that’s what amount, and what prices. So business is usual in that regard for us.

The second thing, always want to reiterate around that by the way around most other fundamental either operating variables or principles is we’re going to give clear headsup if we do change that..

And by the end of 2016 I believe you in as much as said that you will perhaps in as many as 7 to 8 markets for fiber total?.

Yes, that’s right..

So is it appropriately to look at fiber markets as Google sort of [indiscernible] to the market by getting a bunch of cities all exited, educated, reved up on getting fiber laid and then several of them didn’t make Google's final cut, so there is a ready market, ready and anxious market perhaps for cities that are anxious to get fiber in their town..

We have spoken to a couple of cites who have exactly that experience where they mobilize at a city level around the Google Fiber initiative and where they then subsequent do get chosen.

You know I think one of the things that fundamentally separates us from Google is that we are willing to work with cities in a number of different ways, across a different models, cities like that.

They like to be able to be able to consider a public private partnership but I can tell you that the cities that have gotten excited for Google and we have subsequently spoken to they have well primed and the discussions tend to be a little bit smoother.

One other things to note that is we do -- we are very comfortable looking as you can see by our first couple of markets and I think you will see going forward, we’re very comfortable looking at smaller markets than Google is.

We think there are potentially some very interesting opportunities in smaller towns and cities and when I talked earlier about testing some core assumptions and experimentation I think one of the things you will see as experiment is a bit of sort of how small can we do feasibly because if you can do that, if we can take on small bytes profitability that’s just a fantastic opportunity both from a competitive standpoint and from a sort of number of opportunity standpoint..

So based on that, it sounds like we shouldn’t be thinking of Charlottesville and Westminster as just sort of test markets let's see if this works. These are situations you got into with legitimate profit making goals..

Yes very comfortably. I think that the right way to look at these businesses, the way that we think about them internally is they are nice profitable small businesses, each in and of themselves.

So if we can pull 1 million, 2 million, 3 million, 4 million in EBITDA a year out of the market we think that’s fantastic and it's fantastic relative to the investments, relative to the effort.

And you know the sort of the financial models look really pretty, obviously those numbers when I'm down at the very low end I'm thinking of some of those small population markets.

But I think you will see you know Charlottesville and Westminster you know kind of maybe in the slightly lower but maybe even in the sweet spot of our population size and each of those markets will be profitable on their own..

And at the same time perhaps some of these Google candidates that were left at the alter so to speak those would be much larger opportunities?.

Some, but Google didn’t have strict limitations of who applied. So I mentioned we had spoken to a couple of Google Fiber cities, you know one of them was kind of in our sweet spot around population and the other was a bit bigger..

But at any rate I mean it looks like pipeline it sounds like you guys to a degree are kind of drinking out of a fire hose here?.

Yes. I think our limiting factor is not cities that want to work with us and have us come and build fiber or build fiber themselves and partner with us.

Our limiting factor is we want to continue to crawl, walk, run as we do everything with we do we expect to be excellent at it and this business is a complicated business so that feels like the right size of ramp and in addition the right amount of capital to deploy as we’re starting to put some bones on what 2016 might look like.

We don’t want to go from a current level of capital deployment in just all of a sudden start spending like crazy. We want to do this in a measured way and one of the things we’re very attentive to is that downside risk.

Even with moderate take up rates of what would be relative to existing implementations low take up rates, you can still grudge your money out in these markets. So that’s something that’s very important to us because as you know we pride ourselves around capital allocation and return on equity..

There are no further questions in queue at this time Mr. Noss. I will turn the call back over to you for any closing remarks..

Thank you everyone for joining us and we look forward to speaking with you next quarter. Thanks, Operator..

Ladies and gentlemen this does conclude today's conference call. Thank you for joining us. You may now disconnect..