Tucows gets price target cut at Cantor Fitzgerald Canada

Cantor Fitzgerald Canada analyst David Tomljenovic says he was overly optimistic about the number of subscriber additions that Tucows’ (Tucows Stock Quote, Chart, News: TSX:TC, Nasdaq:TCX) Ting Mobile would make, and is now reducing his revenue and EBITDA forecast for the remainder of this year because of it.

Yesterday, Tucows reported its Q1, 2016 results. The company earned (U.S.) $4.43-million on revenue of $45.6-million, a 13 per cent increase from the $40.5-million topline the company posted in the same period last year.

“The first quarter was a solid start to 2016, carrying forward the momentum of last year with strong year-over-year growth in each of our key financial metrics,” said CEO Elliot Noss. “Revenue increased 13 per cent to a record $45.6-million as steady performance from our domain services business and continued growth from Ting Mobile contributed to further expansion of our gross margin to 33 per cent. We also achieved records for both adjusted EBITDA at $7.5-million and net income at $4.4-million, or 42 cents per share.”

Tomljenovic says that while Ting Mobile continues to deliver impressive growth an inevitable problem is surfacing.

“While as impressive as Ting Mobile’s growth was in the quarter, the rate of change of growth continued to decelerate which is understandable – as the user base grows, the growth rate becomes more difficult to sustain,” says the analyst. “Our expectations in this regard have proven to be too aggressive. We have reduced our quarterly new subscriber rate to 6,000 / quarter down from our previous assumption of 9,500. This makes up the majority of our reduced revenue estimate. Given the strong impact that Ting revenues have on gross and EBITDA margins, this also brings our EBITDA number down. We are in-line with management’s 2016 EBITDA guidance of approximately U$30M with our estimate of U$30.6.”

In a research update to clients today, Tomljenovic maintained his “Buy” rating on Tucows, but lowered his one-year price target on the stock from (U.S.) $36.00 to $29.00, implying a return of 23% at the time of publication.