Tucows has price target cut at Echelon, keeps “Buy” rating

2020 looks to be another build year for Tucows (Tucows Stock Quote, Chart, News TSX:TC), according to Echelon Wealth Partners analyst Gianluca Tucci, who reviewed the company’s latest quarterly results in an update to clients on Thursday.

With the update, Tucci kept his “Buy” rating but dropped his price target from C$100.00 to C$90.00, representing at press time a projected 12-month return of 16 per cent.

Toronto-headquartered Tucows is an Internet services company with two operating segments, Domain Services and Network Access Services, the latter of which includes selling retail mobile phones and services to individuals and small businesses through the company’s Ting website.

Tucows on Wednesday reported its fourth quarter 2019 financials, which featured revenue of $85.9 million and adjusted EBITDA of $16.2 million, with Domain Services registering $61.8 million and Ting $24.2 million. (All figures in US dollars except where noted otherwise.)

President and CEO Elliot Noss said in a press release that Tucows took meaningful steps in 2019 to position itself to capitalize on “the greatest opportunity in telecom in a couple of generations.”

“In our Domains business, we focused on strengthening the quality of the wholesale customer base to maximize gross profit of that channel, which expanded 15 per cent over the prior year, as we made steady progress on our platform work to support future growth. In our Ting Mobile business, we announced positive changes to our service provider agreements that further enhance our already very compelling offering and provide much improved economics, setting the stage for better long-term prospects for
our mobile business. And at Ting Internet, we invested more than $32 million in our network build, growing the number of passed homes by more than 60 per cent and expanding our customer base by 46 per cent, while adding four new towns that expanded our potential serviceable addresses by 74 per cent,” Noss said.

The Q4 came up light on revenue compared to Tucci’s estimate of $90.8 million but consolidated gross margin at 30.3 per cent was better than his 29.0 per cent estimate, while the $16.2 million in adjusted EBITDA was also better than Tucci’s $12.8 million forecast.

With the Q4 release, management introduced guidance of $50 million in adjusted EBITDA for 2020. Tucci noted that fiber contribution will improve from 2019 but will still likely be a negative contributor before making a meaningful contribution by 2021 and 2022.

“While we still believe in the longer-term thesis and fibre upside, we now view 2020 as another build year before booking early benefits in 2021 and evidenced in the newly introduced 2020 guidance of $50 million in Adj. EBITDA versus our prior $56 million estimate,” Tucci wrote.

The analyst continues to believe that Tucows’ next major growth catalyst will come from its fibre business.

“Today’s 10.2K fibre customers add roughly $10.2 million in run-rate gross profit. We believe we could see fibre customers and homes passed of approximately 14-20K and 45-55K, respectively, by 2020-end, which would yield $14-20 million in incremental annual run-rate gross profit. For context, fibre customers and homes passed ended 2017, 2018 and 2019 at 4.5K/16.0K, 7.0K/28.1K and 10.2K/36.4K, respectively, showing steady early-stage 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,” Tuccie wrote.

The analyst has updated his forecast, now calling for fiscal 2020 revenue and adjusted EBITDA of $338.1 million and $50.5 million, respectively, and fiscal 2021 revenue and adjusted EBITDA of $353.3 million and $59.0 million, respectively.