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3 Things Tucows' Management Wants You to Know

Anders Bylund, The Motley Fool

Domain name registrar and network services operator Tucows (NASDAQ: TCX) recently reported fourth-quarter results where both revenues and earnings fell compared to the year-ago period. The company reported earnings of $0.42 per share on $85.6 million in top-line sales as Tucows handed off nearly 3 million domain names to other registrars and struggled to find traction for its Ting Mobile network services.

As always, the headline numbers don't tell the whole story about this quarterly report. Rather than holding an open conference call with financial analysts to dissect the results further, Tucows' management chose to divide its post-earnings discussion into two separate items. First, management read its prepared remarks to a public conference line. Then, it collected questions from analysts to answer in a separate document two weeks later. That stand-alone Q&A text was published this week.

Now that we have the whole report at hand, let's have a look at the three most important pearls of wisdom Tucows shared regarding the fourth quarter's results.

Two cows grazing under a rainbow.

Image source: Getty Images.

1. Tucows is focusing on higher-margin domains

The company transferred 2.8 million "very low margin" domain names to other registrars in the first and third quarters of 2018. In the fourth quarter, Tucows sold a collection of domain names to GoDaddy for $3.2 million. These occasional domain-list sales are a source of quick cash and also an important margin-boosting tool.

"With respect to domain portfolio sales, our portfolio of domains that we hold for resale in the aftermarket is something that we consider tactical, not strategic, as an asset," said Tucows CEO Elliot Noss.

Investors should expect more of these sales in the coming years, but Tucows has no specific deals in the works right now.

"The bulk portfolio sale in Q4 2018 was generated from our non-surname portfolio of names held," Noss said. "The bulk sale in each of the last two years in Q4 were tied into, and part of the timing of, other related operational changes, including the move of our Tucows expiry stream to a different partner. While a similar sale is possible in any quarter, we currently have no plans in this regard."

2. This year will be different than last year's rebuilding period

Last year was a slow period for Tucows. Noss expects to deliver fresh growth in 2019, followed by accelerating improvements beyond this fiscal year.

"2018 was definitely a bridge year with a lot of work that will only show itself over time. In 2019, the mix of work moves to include much more that is moving the business forward," Noss said. "2019 is not as much of a heads-down year as 2018, but it is also not yet living in the next chapter of the Tucows story."

The company will continue to invest in long-term growth projects in 2019, but last year's capital expenses should also start paying dividends. To put the 2018 hump into perspective, Tucows spent 75% of its operating cash flows on capital projects during the full year. That's up from just 40% in 2017.

3. Don't expect any huge changes to Ting's technology

The landline Ting Internet service won't change its underlying network infrastructure any time soon.

"We have the inevitable series of questions asking about 5G, coax, low-earth-orbit satellites and other alternative means of providing data. We continue to be crystal clear," Noss said. "We believe that fiber, light over glass, is the physical infrastructure that will predominate for the next century."

According to Noss, the Ting Internet service rests on a very simple business model with centennial legs: "We are laying fiber to the home and providing the fastest Internet service at a fair price, with a great customer experience. We are concerned with the next 100 years, not the next 90 days."

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of Tucows. The Motley Fool recommends GoDaddy. The Motley Fool has a disclosure policy.