Welcome to Tucows’ first quarter 2019 investor call. Management has pre-recorded its prepared remarks regarding the quarter and outlook for the Company. A transcript of these remarks is also available on the Company’s web site.
In lieu of a live question and answer period following the prepared remarks, shareholders and analysts are invited to submit their questions to Tucows’ management via email at ir@tucows.com.
Management will address your questions directly, or in a recorded audio response and transcript that will be posted to the Tucows website on Tuesday, May 21st at approximately 4 p.m. eastern time.
We would also like to remind you of the Tucows Quarterly KPI Summary that we began publishing on our website last quarter, which provides key metrics for all of our businesses by quarter since 2017. The updated version is available now in the Investors section. Now, on to management’s prepared remarks.
On Wednesday, May 8th, Tucows issued a news release reporting its financial results for the first quarter ended March 31st, 2019. That news release, and the Company’s financial statements, are available on the company's website at tucows.com, under the Investors page.
Please note that the matters the company will be discussing include 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 detail 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..
stimulating and attracting business; fostering community, education and healthcare; increasing home values; and overall desirability of the community. We also hope our towns will be surprised and delighted by a service provider like Ting that is energetic, innovative and eager to please.
The comments by the Mayor, Town Manager and first customer in Fuquay-Varina at our lighting ceremony captured these benefits beautifully, video link here and I encourage you to see more of what is happening on the ground in our towns through the posts and videos on our Ting blog and YouTube channel.
In early April, we announced that Fullerton, California -- about thirty miles off the coast, in Orange County -- would be our next Ting town. Ting will provide service in Fullerton through a partnership with SiFi networks, a private infrastructure company.
SiFi will build, own and operate the network and we will provide service on that network as we do in Westminster, Maryland (although, in that case, on municipal fiber). This model allows us to focus on what is still undeniably our core competency -- provisioning, billing, and supporting customers.
It also helps us scale our serviceable addresses, and customers, and recurring revenue more quickly. Of course we do not own the physical plant and we do not have complete control of the service delivery, from network planning to construction to operation. We do not need to choose between our two approaches.
We will continue to pursue a range of models and track the experiences and results of each closely. Fullerton includes just over 50,000 serviceable addresses at scale. Although importantly, there is a competitive service provider with access to the same network.
We do not expect or need the same 20% adoption in one year and 50% in five that we project in markets where we are the exclusive fiber provider. If you want a simple benchmark with two providers, cut it in half. We hope to light up customers in Fullerton either very late this year or early next. It will not affect gross margin this year.
We will give more specific guidance when and if that number becomes material. A few other insights and highlights from around the footprint. In all our towns, we now are participating in greenfield builds -- or new housing developments. These allow us to add serviceable addresses to existing footprints, at a lower cost.
We like everything about new developments. Getting our conduit, fiber and vaults into open trenches at the very beginning of construction is simpler and cheaper than building in existing neighborhoods. We get a fair shot at residents moving into new homes, without the encumbrance of existing contracts and early termination fees with other providers.
We also have found developers to be enthusiastic marketing partners since crazy fast fiber Internet adds appeal to their properties, and the Ting brand has developed a stellar reputation in its existing footprints.
Some of our markets--the Raleigh area and Charlottesville in particular--are seeing strong pipelines of new housing developments, which will drive organic serviceable address growth in these markets for years to come.
As these opportunities materialize, greenfield additions will show up as incremental increases in footprints’ serviceable address counts over time. We have completed our first full seasons of play as WiFi providers in the University of Virginia’s Scott Stadium, and John Paul Jones Arena in Charlottesville.
I would not credit Ting for the University of Virginia winning its first bowl game in over ten years, and its first ever NCAA men’s basketball national championship in those first seasons. But it does seem like a remarkable coincidence.
More importantly, those experiences have added greatly to our knowledge and skills on large scale fixed and wireless solutions, and will serve us well with campuses, public spaces, apartment buildings, corporate offices and other enterprise projects around the country. Finally, Ting TV inches closer to public launch.
We are testing extensively among friends and current customers. By later this year, we look forward to seeing how the addition of a television offering in select towns lifts our overall conversion to Ting. We continue to feel confident about the core business as modeled. Adoption of 20% after one year and 50% after five.
Customers deliver $1,000 a year in margin. And our build costs are coming in between $1,000 to $1,400 per serviceable address, or $2,500 to $3,000 per customer at that projected 50% adoption. I'd now like to turn the call over to Dave to review our financial results for the quarter in greater detail.
Dave?.
Workforce and third-party workforce-related expenses, increased by $0.5 million partially the result of the growth in Internet subscribers and the Ting Internet footprint and as well, increased people costs from the acquisition of Ascio on March 18th; Marketing expenditures increased $0.4 million related to higher spend on Ting Mobile, and; We had a $0.4 million increase in other costs, including credit card fees as well as investments in tools and technology to support our growing employee base.
This was partially offset by positive foreign currency impacts in the quarter, where we had a $100,000 unrealized gain in Q1 2019 related to mark to market remeasurements for our currency forward contracts that do not qualify for hedge accounting compared a neutral impact last year.
In addition, we experienced a foreign exchange gain on the revaluation of foreign denominated monetary assets and liabilities, which had the impact of decreasing our expenses $0.5 million on a year over basis. As a percentage of revenue, total operating expenses increased to 22% from 18%.
Net income for the first quarter of 2019 was $2.8 million, or $0.26 cents per share, compared with $3.7 million, or $0.35 per share, for the same period last year. Adjusted EBITDA was $9.4 million compared with $10.4 million for Q1 last year.
I will note that the impact of the fair value adjustment on deferred revenue related to the Ascio acquisition was about $200,000 this quarter.
Turning to our balance sheet and cash flows, cash and cash equivalents at the end of the first quarter of 2019 was $11 million compared with $12.6 million at the end of the fourth quarter of 2018, and $16.6 million at the end of the first quarter of last year.
The decrease in cash from the end of Q4 of last year was primarily the result of our investment during Q1 of an additional $10.4 million in property and equipment, primarily for the Ting Internet build out, which was substantially offset by the generation of $9 million in cash flow from operations.
Deferred revenue at the end of the first quarter was $159 million, up from $144 million at the end of the fourth quarter of last year, and up from $151 million at the end of the first quarter of last year. Both the year-over-year and sequential increases are due to acquisition of Ascio in March of this year.
That concludes my remarks and I’ll now turn the call back to Elliot..
The long term opportunity of the fiber business. I come out of these meetings emboldened, humbled, appreciative and, most importantly, focused on us being the first, best Internet telecom company in the world. In building our organizational muscles to scale up faster, but not too fast.
In recognizing that we can only do this well and right by continuing to improve, particularly in the areas where we are already best in the category. In finding the extraordinary in the ordinary. And with that, I look forward to your written questions and exploring areas that interest you in greater detail.
Again, please send your questions to ir@tucows.com. Thank you..
End of Q&A:.