Tucows Inc (TCX) Q3 2026 Earnings Call Transcript

Welcome to Two Cows Third Quarter 2026 Management Commentary. We have pre-recorded remarks regarding the quarter and outlook for the company. A Two Cows generated transcript of these remarks with relevant links is also available on the company's website. We will begin with opening remarks and business segment commentary from David Warwick, President and CEO of 2COWS and 2COWS Domains, followed by Ivan Ivanov, 2COWS CFO and Ting's CEO, who will discuss our financial results in detail, and we will finish with closing remarks from David Warwick. In lieu of a live question and answer period following these remarks, shareholders, analysts, and prospective investors are invited to submit questions to 2COWS Management. Please submit questions via email to ir at 2cows.com until Thursday, November 12th. Management will either address your questions directly or provide a recorded audio response and transcript that will be posted to the 2cows website on Wednesday, November 18th at approximately 5 p.m. Eastern Time. We would also like to advise that the updated investor presentation and the 2COWS quarterly KPI summary, which provides key metrics for all of our businesses for the last seven quarters, as well as for full years 2024, 2025, and 2026 year-to-date, and also includes historical financial results, is available in the investors section of the website. Now for management's prepared remarks. On Thursday, November 5th, TUCAS issued a news release reporting its financial results for the third quarter ended September 30th, 2026. That news release and the company's financial statements are available on the company's website at tucas.com under the Investor section. Please note, the following discussion may include forward-looking statements, which are subject to risks and uncertainties that could cause 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 forums 10-K and 10-Q. The company urges you to read its security filings for a full description of the risk factors applicable to its business. Now I would like to turn the call over to 2COW's President and Chief Executive Officer, David Warwick. Go ahead, Dave.

Thank you, Monica. Q3 was another good quarter for adjusted EBITDA, and we made meaningful progress on simplifying our financial obligations. Revenue was $100 million, up modestly year-over-year, gross profit increased to $29.1 million, and adjusted EBITDA rose to $18.6 million. It's important to note, however, that a significant part of the improvement came from the renegotiation of our legacy mobile agreement in August, which included a non-recurring credit recognized in the quarter. Net of the out-of-quarter credit gross profit would have been $27.4 million, up 13% year-over-year, and adjusted EBITDA would have been $16.9 million, up 27% year-over-year. The new carrier agreement improves the economics of that business going forward, addressing a headwind we have discussed for our corporate segment over the past several quarters. Ting continued to contribute positively, and domains in Wavelow remain focused on profitability and execution. This update also comes as I reach my first anniversary as CEO. A year ago, we set out to build a simpler, more focused, and more capital-efficient 2COWS. I'll return to our progress against those priorities in my closing remarks, along with our outlook for the rest of 2026. First, I'll review the quarter across our businesses, and then our CFO, Ivan Ivanov, will review our financial details. 2COWS domains remained our largest contributor to profitability, generating $11.1 million in adjusted EBITDA. Revenue declined 6% year-over-year to $63.9 million, reflecting the previously discussed normalization of customer volumes. Domains under management held steady sequentially at $21.3 million. Gross profit and adjusted EBITDA were lower year over year, reflecting a lower contribution from expiry sales. Although we continue to optimize this revenue stream, its performance is highly variable from quarter to quarter and also sensitive to certain macroeconomic conditions, making it less predictable than our core business. Compared with Q3 2025, margin from the expiry stream for Q3 2026 was down $0.9 million, leading to the year-over-year decrease in gross profit and adjusted EBITDA. The core wholesale business was solid, and retail performance grew modestly year-over-year. Our focus in domains remains on margin and cash generation, and key levers for both continue to be our broad reseller base and operating scale. As we strengthen the balance sheet and reduce debt, we are creating flexibility and will be investing more meaningfully in the domains business after several years of constrained capital allocation. We have been focused on integrating AI capabilities and support for agentic workflows into our platform, with testing showing strong results for the user experience. These advancements will be made available early in the new year, and as we progress through 2027, we will use our improved financial flexibility selectively, prioritizing further investments that improve the customer experience, strengthen our competitive position, retain and grow our reseller base, and keep our scale working for us. WaveLow generated $11.7 million in revenue, modestly below the prior year quarter, while adjusted EBITDA increased to $4.6 million. Lower operating expenses, particularly in technology and development and sales and marketing, supported that improvement. Subscriber moderation at Echostar continues to affect performance. Gross profit was below the prior year, reflecting costs associated with delivering bundled professional services. We remain focused on converting qualified opportunities into recurring revenue while managing spending against the results we are delivering. As we said last quarter, further investment needs to be supported by execution and measurable progress, and we continue to track that closely. Ting delivered another quarter of positive adjusted EBITDA at $1.5 million, compared with a loss a year ago. Revenue increased 31% to $22.3 million, supported by subscriber growth and construction services at Laguna Woods Village. Internet subscribers under management reached 64,000, with approximately 3,500 net additions in the quarter. After quarter end, we announced an agreement to assign Ting's Colorado Springs lease. The transaction is expected to close in March 2027, with the related 2CAS parent guarantee expected to terminate by the end of April, subject to closing and satisfaction of standard obligations. Ting will continue to serve its customers through the transition. This agreement, once closed, will eliminate Tucao's material parent company obligation for Teng, an important step in simplifying our balance sheet. The broader strategic process remains a priority for management and the board, and we continue to operate the business responsibly while working towards an outcome that supports shareholder value. Now we'll hear from our CFO, Ivan Ivanov, who will discuss our financial results in detail.

Thank you, Dave, and thank you all for joining us today. I will cover consolidated results, then each of the segments, and we'll close with cash flow and balance sheet. Consolidated net revenue for the third quarter of 26 increased 1.4% to 100 million from 98.6 million in the third quarter of 25 and was flat sequentially from Q2. The year-over-year increase was driven primarily by Tink through subscriber growth and construction services revenue. Q3 gross profit was 29.1 million, up 20% year-over-year from 24.2 million and up 13% sequentially from 25.8 million. The increase was driven primarily by a large, non-recurring credit in our corporate segment following the renegotiation of our mobile carrier agreement and, secondarily, by year-over-year improvement from Ting. Because the credit in our corporate segment is material to the quarter, let me expand. We renewed our mobile carrier agreement in August on improved rates, with the new rates applied retroactively to May. We recognized approximately 4.3 million of cost of goods credit in the third quarter as a result. Of that amount, approximately 1.7 million relates to May and June and will not repeat. We expect a portion of the remaining benefit to continue going forward. Operating expenses increased year-over-year, driven by higher general and administrative expenses, primarily professional fees in connection with our strategic work and by severance costs in our corporate segments, which were associated with role eliminations. We delivered 18.6 million in adjusted EBITDA this quarter, up 40% from 13.3 million in Q3 of last year, and up 51% sequentially from 12.3 million in Q2. Of the 5.3 million year-over-year increase in consolidated adjusted EBITDA, approximately 1.7 million should be treated as non-recurring as discussed previously. The balance of the improvement reflects the new mobile contract economics and operating gains at Think. On a gap basis, net loss for the quarter was $10.3 million, or a loss of $0.92 per share, compared with a net loss of $23 million, or a loss of $2.08 per share in Q3 of last year. On a non-gap adjusted basis, net loss was $5.8 million, or a loss of $0.52 per share, compared with an adjusted net loss of $15.8 million, or a loss of $1.42 per share in Q3.25. Let me take a moment on the team preferred units because you will not find the associated gain in this quarter's results. On July 27th, we acquired and retired all outstanding Series A preferred units. At the retirement date, they were carried at $149.3 million, including the accrued preferred return, and we settled at them for $3 million in cash plus certain contingent obligations, which released all redemption, conversion, and call rights, and And we drew the December 25 return breach and trigger event notices. We accounted for this as a travel debt restructuring, and because one of those contingencies carries no stated maximum, the maximum future payments are undeterminate, and the recognition of the gain is deferred until the contingency expires. The $3 million reduced the carrying amount, and the remaining $146.1 million is presented on our September 30th balance sheet as a deferred gain on restructuring debt within current liabilities. It will be recognized in our earnings net of any payments made as the contingencies resolve or expire within the next fiscal year. Let me now walk through the segments. As a reminder, our presentation of segment gross profits reflect amounts net of network expenses, aligning external reporting with how we evaluate the businesses. We continue to provide additional segment gross margin and network expenses detail in our quarterly KPI summary. Starting with 2CALS domains, Q3 revenue for 2CALS domains declined 6% year-over-year to $63.9 million from $67.8 million. This continues to reflect the large reseller that moved lower-margin domains in-house, which has now worked through a full annual renewal cycle, in addition to reduced revenue from our Xperia stream this quarter. Wholesale revenue declined 7% to $54 million from $58 million. Within wholesale, domain services revenue was $48.9 million compared with $51.9 million in the prior quarter, and value-added services revenue was $5.1 million compared with $6.1 million. The value-added services comparison is against an exceptionally strong Q325, which grew 21% year-over-year on Xperia stream sales. Retail revenue was $9.9 million compared with $9.8 million last year. Gross profit after network expenses was $17.8 million compared with $19.1 million in Q3 of last year. I would highlight that gross margin as a percentage of revenue improved approximately 60 basis points year over year, reflecting the better revenue mix that follows the normalization of those low margin volumes. And finally, domains adjusted EBITDA was $11.1 million compared with $12.1 million in Q3 of last year. This is primarily due to a lower quarter for our expiry business and absent that, the underlying earnings profile of the business is healthy. Turning to wave law, Q3 revenue was $11.7 million, down 1% from $11.9 million in Q3 of last year and effectively flat sequentially. Q3 gross profit after network expenses was 7.1 million compared with 7.7 million last year. The year-over-year decline reflects project costs recognized in the current quarter against bundled professional services delivered in the period where there were no comparable bundled professional services cost in Q3 of 25. Adjusted EBITDA improved to $4.6 million from $4.3 million in Q325, and operating expenses declined year-over-year, primarily from lower technical operations and development personnel costs on a smaller workforce and lower sales and marketing costs. Subscribers continue to churn in the EchoStar base. The key takeaway for Waverlo this quarter is that the adjusted EBITDA improvement came primarily from cost discipline. Turning to Think. Q3 revenue was $22.3 million, up 31% from $17 million in Q3 of last year. Fiber internet services revenue was $18 million, supported by subscriber growth, and Think recognized $4.3 million in construction services revenue associated with the Laguna Woods Village HOA, with no comparable revenue in the prior year period. Internet subscribers under management ended the quarter at approximately 64,000, an increase of approximately 12,000 year-over-year, with approximately 3,500 net additions in the quarter. Things Q3 gross profit after network expenses was $2.7 million, compared with $0.3 million in the prior quarter. Gross margin percentage continues to reflect the shift towards partner markets, which carry network lease costs, and in the quarter also reflected higher costs in Colorado Springs and Memphis associated with adverse delivery. Being adjusted even was positive 1.5 million compared with a loss of 0.9 million in Q3 of last year and positive 1.5 million in Q2. This is the second consecutive quarter of positive adjusted even. At the corporate level, Q3 revenue was $2 million compared with $1.9 million in Q3 of last year, corporate gross profit was positive $1.5 million compared with a negative $2.9 million in the prior year period, and corporate adjusted EBITDA was positive $1.4 million compared with a negative $2.2 million last year. That swing is almost entirely the mobile credit I described at the beginning. Two items partially offset it. Income earned on the sale of transferred assets, which is the tail of our legacy mobile subscriber base, declined to $2.4 million from $3 million a year ago, and that decline is expected to continue. We also incurred severance costs in the quarter related to raw eliminations. The structural point is that the renegotiated agreement resolves the per-subscriber economics that have pressured this segment for the past several quarters. Going forward, we expect corporate to carry the improved rates and the declining legacy tail without the catch-up credit. On cash flow, consolidated cash flow from operating activities was negative 4.6 million in Q3 26, compared with positive 1.5 million in Q3 of last year. For the first nine months of 26, cash flow from operating activities was positive 0.8 million, compared with negative 3.2 million in the first nine months of 25. I want to explain the quarter clearly because 18.6 million of adjusted EBITDA and negative operating cash flow is a wide gap. There are four components. First, interest. We paid 8.1 million of net interest in the quarter, of which 5 million was interest on Tink's ABS facilities. Second, cash taxes of 2.3 million. Third, and most significantly, working capital was a use of approximately At least 12.8 million. Accounts receivable increased 5.4 million, and accounts payable accrued liabilities and other items decreased 9.4 million, partially offset by 4 million reduction in prepaid expenses. The payables movement reflects the timing of settlement on professional fees and transaction costs incurred earlier in the year. And fourth, the mobile credit that lifted adjusted EBITDA is applied against billings rather than received as cash in period. Breaking out Q3 operating cash flow by business, domains, web law, and corporate generated approximately $3.3 million, while Tink used approximately $7.9 million, primarily interest on its securitization facilities. On capital expenditures, additions to property and equipment were $5.1 million in the quarter, of which $2.3 million was Tink and $2.7 million was domains, web law, and corporate combined. We ended the quarter with restricted cash and restricted cash equivalents of $41 million compared with $60.2 million at the end of Q2 and $70.8 million at the end of Q3 last year. The sequential decrease reflects the operating outflow I described, plus financing uses of $9.8 million and investing uses of $4.9 million. Financing activity in the quarter included a $6 million repayment on our syndicated facility, $0.7 million of facility amendment costs, and the $3 million purchase price of the Think Series A preferred units. Corporate debt under the syndicated facility was $184.4 million at quarter end, down from $190.4 million at the end of Q2. We remained in compliance with our financial covenants with a leverage ratio of 3.47 times against a maximum of 3.75 times, helped by the $6 million repayment and by improving trailing to amounts adjusted EBITDA excluding PING. On Tink, following the retirement on Series A preferred units in July, Tink's debt now consists of its ABS notes. Tink remained in compliance with its securitization requirements. In summary, Q3 was the strongest quarter of 26 on revenue, gross profit, and adjusted EBITDA, and the balance sheet is materially simpler than it was at the end of Q2. The underlying business remains healthy. I would leave you with three points for the quarter. First, approximately $1.7 million of the adjusted EBITDA improvement is a prior period catch-up and should not be carried forward, although the improved mobile rates themselves are durable. Second, the gap between adjusted EBITDA and operating cash flow this quarter is predominantly working capital timing and think securitization interest. And third, leverage improved, interest coverage improved, and we reduced facility principal, which is the direction we intend to continue. With that, thank you, and I'll pass it back to Dave for his closing remarks. Thanks, Ivan.

Let me begin with how we are tracking against the guidance we set out for 2026. For 2CAS domains, our original adjusted EBITDA guidance was 47 to 49 million. We are tracking just below the lower end of that range, with an expected full-year adjusted EBITDA of $46 million to $47 million. The core business continues to generate substantial earnings, but the outsized contribution from expiry sales has moderated over the back half of the year. For Wavelow, we are tracking modestly below our $14.5 to $15.5 million adjusted EBITDA guidance. Subscriber moderation and the timing of new customer revenue have affected the year. The third quarter improvement in profitability is encouraging, but we continue to assess the need to convert our pipeline and align investment with demonstrated progress. For corporate, we now expect to outperform our guidance of an adjusted EBITDA loss of $6 million to $9 million. The mobile agreement renegotiation is the principal change. It provided a non-recurring benefit in Q3 and improved the ongoing economics, removing the drag associated with the previous contract terms. Corporate results will still reflect overhead and professional fees. Taken together, we remain on track for our consolidated 2026 adjusted EBITDA guidance of $52.5 million to $58.5 million, excluding Ting. The improvement in corporate is helping offset the softer outlook in domains and wave low. As in prior quarters, we are not including Ting in that guidance while its strategic process continues. Ting's second consecutive quarter of positive adjusted EBITDA represents further operating progress. As I look back on my first year as CEO, the priorities I outlined remain the right ones. Improve cash generation, simplify the business, and restore flexibility in how we allocate capital. The actions we have taken over the past quarter and since quarter end are putting those priorities into practice. In July, we acquired and retired all outstanding Series A preferred units in Ting, which carried $149.3 million, including accrued preferred return, for $3 million in cash plus certain contingent obligations. This released the redemption, conversion, and call rights, and the breach and trigger notes from December were withdrawn. The gain is deferred for accounting purposes, but the compounding obligation is gone. We also amended and extended our syndicated credit facility, moving the maturity of all but one lender's commitments to July 2029, with key pricing and financial covenants substantially unchanged. During Q3, we repaid $6 million on the facility, reducing the outstanding balance to $184.4 million. Those are tangible steps in extending our financing and reducing debt. The mobile renegotiation addressed another constraint. Over the past several quarters, I have spoken directly about the effect of our mobile obligations on corporate results. We have now improved those economics, allowing more of the earnings from our operating businesses to contribute to TUCAO's overall performance. And the Colorado Springs Agreement provides a path to release the parent guarantee associated with Ting's network lease. We expect that release in the spring following closing and completion of the required post-closing obligations. Until then, the guarantee remains in place. This is an important reduction in potential future exposure for two cows. Taken together, these actions are making TUCAS simpler to understand and giving us more flexibility to make decisions based on long-term results. They also move us toward the capital light model I described at the beginning of the year. Businesses with recurring revenue, strong customer relationships, and scalable platforms supported by lean operations and disciplined capital allocation. There is still work to do. Consolidated operating cash flow was negative in Q3, and improving adjusted EBITDA must translate into sustainable free cash flow. We need to manage working capital and capital spending carefully, continue to deleverage, and complete the work on TING. Greater flexibility carries an obligation to be disciplined about how we use it, and we are focused on evaluating those options. As those constraints ease, we will be better positioned to invest in our platforms, improve the services we deliver to customers, and pursue growth opportunities where we can earn attractive returns. Our experience in operating and integrating technology services gives us a foundation to build on. The goal is to put that capability to work in ways that compound value per share over time. We are beginning to see the company we set out to transform take shape. The progress crumbs from a series of deliberate decisions supported by the disciplined work of our teams and board. I appreciate their commitment, as well as the continued support of our shareholders, and I look forward to updating you on our continued progress.

If you have any questions about the quarter or today's commentary, please send them to ir2cas.com by November 12th and look for our recorded Q&A audio response and transcript to this call to be posted to the 2CAS website on Wednesday, November 18th at approximately 5 p.m. Eastern Time.