Tucows upgraded to “Buy” at Echelon Wealth Partners

Internet services company Tucows (Tucows Stock Quote, Chart TSX:TC) released its quarterly financials on Wednesday, which were characterized by Echelon Wealth Partners analyst Gianluca Tucci as strong. Accordingly, the analyst has raised his target and changed his rating for TC, going from a “Hold” to a “Buy” and from C$75.00 to C$120.00, implying a return of 30 per cent at the time of publication.

Tucows reported fourth quarter revenue of $85.6 million, Adjusted EBITDA of $16.6 million and EPS of $0.41 per share. (All figures in US dollars unless noted otherwise.)

In his comments on the quarter, President and CEO Elliot Noss highlighted Tucows’ gross profit expansion in both its Domains and Network Access segments nine per cent growth in Adjusted EBITDA.

“The quarter capped off another record year in terms of revenue, gross profit, adjusted EBITDA and cash flow from operations. As importantly, the cash generation of the Domains and Ting Mobile businesses fueled our build-out of the Ting Internet footprint that will drive our next phase of outsized growth,” wrote Noss in a press release.

In a client update on Wednesday, Tucci says that the Q4 results beat his estimate on revenue (his estimate was $83.5 million) and on Adjusted EBITDA (his was $12.6 million) while coming up short on EPS (his was $0.50 per share).

“As noted at the time of our Q318 note, we believed the inflection point to TC’s next leg of growth via its fibre initiatives could be two or three quarters away. Today’s 7K fibre customers add roughly $7.0 million in run-rate gross profit. We believe we could see fibre customers and homes passed of approximately 15-20K and 50-60K, respectively, by 2019-end, which would yield $15-20 million in incremental annual run-rate gross profit,” he says.

“For context, fibre customers and homes passed ended 2017 and 2018 at 4.5K/16.0K and 7.0K/28.1K, respectively, showing impressive growth. We believe TC will continue to add strategic Ting towns that fit its profile and grow the addressable opportunity and resulting visibility in its next growth leg of fibre internet access to the home,” he says.

Tucci says that while Tucows’ domain registration business will remain a cash generating machine, it’s the expansion of Ting Mobile and Ting Internet (currently live in six cities in the US with one more city to come online this summer) that will be the next major growth initiative for TC.