Tucows Inc (TCX) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Tucows' first-quarter fiscal 2005 financial results conference call. Please note that today's presentational will be archived for replay by both telephone and via the Internet beginning approximately one hour following completion of the call. To access the archived conference call by telephone, dial 416-695-5800 or 1-800-408-3053 and enter the pass code 3151037 pound.

The telephone replay will be available until May 11, 2005 at midnight. To access the archived conference call via Internet, go to About Tucows and then to Investor Relations. I would now like to turn the call over to Ms. Hilda Kelly, Investor Relations Resource, Tucows Inc. This call is being recorded Wednesday, May 4, 2005.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for today's call. With me is Elliot Noss, Tucows' President and Chief Executive Officer, and Michael Cooperman, Chief Financial Officer.

Today following market close, Tucows issued a news release reporting the Company's results for the first quarter of fiscal 2005, ended March 31, 2005. The news release is available on our website by clicking on About Tucows, Investor Relations, and then on quarterly financials. You can also contact me directly for a copy of the news release by telephone at 416-538-5493, or by e-mail at IR.Tucows.com, and I will send it to you. If you would like to receive future news releases by e-mail, again please contact me.

Before we begin today, I would like to point out that the matters we will be discussing include forward-looking statements and as such are subject to risk and uncertainties that could cause actual results to differ materially. These risk factors are described in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-K and 10-Q. We urge you to read our securities filings for a full description of the risk factors applicable to our business.

I would now like to turn the call over to Elliot.

Thank you, Hilda. Good afternoon. Thank you for joining us today to discuss our first-quarter fiscal 2005 results. As is our practice, I will begin with a review of the highlights for the first quarter. Mike will then discuss our financial results, and finally I will return with some closing remarks.

Turning to the highlights. Continued strong operational performance in the first quarter again translated into solid financial results, as we saw growth in both our top and bottom lines. Looking at some of the highlights for the first quarter, net revenue grew 16% compared to the first quarter last year as we recorded our second-best quarter ever in terms of revenue at $11.8 million. And if we adjust for a one-time accounting transaction in the third quarter of last year, this was our fifth consecutive quarter of record revenue and our ninth consecutive quarter of growth in revenue.

Income from operations grew to $214,000, and we achieved our 11th consecutive quarter of profitability at 443,000 or $0.01 per share, and our 14th consecutive quarter of positive cash flow from operations at $655,000. Cash earnings for the quarter increased to $1.4 million.

Turning to our customer base, while I have not been providing customer metrics every quarter, I do want to provide this information at least annually. In the first quarter of this year, the number of customers that did at least one transaction with us increased by 6.2% on a year-over-year basis to almost 6900 and the number of customers that did at least 10 transactions increased 3.5% to more than 3600. Even in a market where we are already the leader, where we have significant penetration, we continue to win new customers and add to our base.

Importantly, our data indicates that over time, the component of our customer base comprised of bulk domain registration end-users has continually diminished and been replaced by our target customers, service providers who manage services for other people.

Some of the domain registration metrics. Our performance in the first quarter was once again indicative of our dominant position in the wholesale domain business and our ability to consistently win new business. We set a new record for the number of transactions processed in a quarter, exceeding the 1 million transaction mark for only the second time ever. Domain registration transactions totaled 1.07 million, an increase of 5% from 1.02 million for the same quarter of fiscal 2004. Domains under management increased to more than 4.5 million, representing growth of approximately 444,000 names, or 11% on a year-over-year basis.

With respect to new Internet services, as a whole, our non-domain Internet services continued to grow in the first quarter of 2005 on an annual basis. We experience typically a spike in domain registration gross margin in the first quarter of every year. Thus, the percentage of gross margin build in our wholesale business other than domain names decreased slightly compared to the preceding quarter. We do expect that billings from other services will continue to increase quarter on quarter throughout the remainder of the year. On a year-over-year basis, this number increased to 15% from 5%.

When we look at the proportion of gross margin contributed by all services of the domain registrations, which I will remind you includes retail services other than domain names and our content business, that number increased to 15% for the first quarter, up from 6% a year earlier.

With respect to actual revenue from new services billed in the quarter, the growth number is of course huge because of the small revenue base, and the absolute number is of course small relative to our total revenue picture. But all in, we continue to see nice progress as revenue from new services is not only growing on a relative basis, but the absolute addition to that number continues to grow each quarter.

We have now been selling most of our new services for at least a few quarters, and while we are experiencing traction across the board, our blogware service seems to be attracting the most attention. While it is not the case that revenue from blogware is worth reporting separately, the interest in this service seems to indicate that it has the greatest short-term opportunity.

As with any new service, we also continue to learn how to sell and market more effectively. For example, the way some larger customers are introducing blogware is to turn on large numbers of free trials to their customer bases. This means that we and our customers must learn how to maximize the number of customers that actually engage in the trial and learn how to most effectively convert those trials into paid accounts. The one thing I can guarantee you is that both we and our customers will be better at this four quarters from now than we are currently.

This is service specific learning that there is simply no shortcut for. Our experience with digital certificates bears this out. This product languished for the first four or five quarters following launch until we got the offering right and learned how to market and sell it. Then we saw a material spike in its contribution, to the point where it is now a nice little business for us. And digital certificates are significantly less complex than something like blogware, so it was easier for that learning to occur.

It is our goal to continue to introduce new services that help Service Providers strengthen their relationships with their end-users and generate additional revenue. This quarter, we launched the beta version of our new start service, which you can view at start.tucows.com. We did this to elicit early customer and user feedback as we prepare for its formal introduction.

Strategically, this service comes from two places. First it is intended to provide service providers with a more effective means by which to communicate with their customers, making it easier for their customers to use and manage their services, as well as be aware of changes in these services.

Second it allows Service Providers to capitalize on their user search traffic, while providing them with a useful, less intrusive means of navigating the Internet. Think of My Yahoo without the advertising and with easy access to service specific functionality like webmail or control panels for other services. This is intended to allow our Service Providers to participate in lead generation in the same way as an AOL or an EarthLink, and we all know that today one wants to be in the business of selling leads, not buying them. We hope to launch broadly in the second half of this year.

I would now like to turn the call over to Mike to review the financial results for the quarter.

Thanks, Elliot. The momentum we exhibited throughout 2004 continued into the first quarter of fiscal 2005, as we achieved growth in revenue, earnings, cash flow from operations, and deferred revenue. Net revenue for the first quarter of fiscal 2005 increased $0.16 to 11.8 million from 10.2 million for the first quarter of fiscal 2004.

Net revenue from domain name and ancillary services for the quarter increased by 1.2 million, or 13%, to 10.8 million from 9.6 million for the first quarter of fiscal 2004, primarily as a result of increased volumes from new and existing customers, as well as the additional revenue earned as a result of the April 2004 acquisition of Boardtown Corporation.

Revenue from advertising and other content sources for the first quarter increased by 72% to just under 1 million from 571,000 for the first quarter of fiscal 2004. The primary contributor to this increase continues to be growth in advertising revenue from third party advertisers.

Gross margin for the quarter increased to 39% from 37% for the first quarter of fiscal 2004, and fell slightly from 40% for the fourth quarter of fiscal 2004. The increase in gross margin compared to the first quarter of last year resulted primarily from the shift in revenue mix away from domain registrations to higher gross margin services like advertising revenue and billing, provisioning, and customer care software solutions.

The small decrease in gross margin compared to the fourth quarter of last year is mainly the result of the seasonality that Elliot mentioned earlier, that tends to result in domain names sales being higher in the first quarter than in any other quarter. This change in sales mix during the first quarter has a dampening effect on gross margins, as domain names have a lower gross margin than our other services.

Operating expenses for the quarter increased by 749,000 to 4.4 million, or 37% of revenue, up from 3.6 million, or 36% of net revenue, for the first quarter of last year and 3.8 million, or 33% of net revenue, for the fourth quarter of fiscal 2004.

To assist you in understanding our operating costs, I will once again break them into two components. Core operating expenses, which consist of ongoing sales, marketing, technical operations and development and administrative costs, for the first quarter increased by 601,000, or 19%, compared the first quarter of fiscal 2004. The primary contributor to this increase was higher people costs of $668,000 mainly as a result of the appreciation in the Canadian dollar and our ongoing initiatives to strengthen our customer service and expand our sales reach, as well as the deployment of additional development resources to enhance and extend our platform and service offerings.

The increase in other core operating expenses of 78,000 generally reflects the more sophisticated infrastructure required to support our business as it continues to grow.

These costs were offset by a reduction in ICANN accreditation fees of 144,000 due to the fact that we now record the ICANN transaction fee as a cost of revenue. As I explained last quarter, this change arose as a result of ICANN modifying their fee structure from a prorated portion of accreditation fee basis to a transaction fee model effective from November 1, 2004.

As a percentage of net revenue, core operating expenses for the first quarter increased to 33% from 32% for the first quarter of fiscal 2004. Other operating expenses for the first quarter increased by 148,000 to 523,000 compared to the first quarter of fiscal 2004, primarily for the following reasons.

First, we incurred professional fees of 155,000 during the quarter that were attributable to the requirement that we, as a U.S. corporation with its principal operations in Canada, periodically assess whether our corporate structure is the most efficient and effective to meet our business requirements from both an operational and tax perspective.

Second, we recorded a foreign exchange loss of 67,000 during the first quarter of fiscal 2005, which was slightly higher than the 41,000 recorded for the first quarter of fiscal 2004 as a result of the continued strengthening in the Canadian dollar. And third, during the first quarter of fiscal 2005, we incurred amortization costs of 59,000 in connection with our acquisition of Boardtown in April of 2004.

These cost increases were partially offset by a decrease in depreciation costs of 71,000 compared to the first quarter of last year, primarily as a result of all the software now being fully depreciated and a decrease in stock-based compensation of 21,000 due to it having been fully expensed by March 2004.

Income from operations for the first quarter of fiscal 2005 increased to 214,000 from 111,000 for the first quarter of fiscal 2004. Net income for the first quarter rose to 442,000, or $0.01 per share, from 149,000, or $0.00 per share, for the first quarter of fiscal 2004. In comparing net income for the two quarters, it should be noted that during the current quarter, we recorded a tax recovery net of Canadian provincial taxes otherwise payable of 152,000. This amount represents the actual investment tax credit payment we received from the Canadian authorities with respect to the research and development undertaken in 2001 through 2003.

The first quarter marked our 14th consecutive quarter of positive cash flow from operations, further strengthening our balance sheet. Cash and restricted cash at the end of the quarter was 15 million, an increase of 1.3 million from 13.7 million at the end of the first quarter of fiscal 2004, and an increase of 600,000 from 14.4 million at the end of the fourth quarter of last year. Net cash provided by operating activities was 655,000 for the first quarter, compared to 566,000 for the first quarter of fiscal 2004.

The other source of cash during the quarter came from the proceeds generated by the exercise of stock options of 181,000. These increases were partially offset by cash used in the purchase of property and equipment, which consisted primarily of computers and related software to meet our operational needs, of approximately 201,000.

Our deferred revenue balance at the end of the first quarter grew to 35.8 million, an increase of 14% from 31.4 million at the end of the first quarter of fiscal 2004, and an increase of 8% from 33.3 million at the end of the fourth quarter of last year.

In summary, we are pleased to be able to report that we have been able to continue to grow revenue and profitability while we continue to invest in our business. We are committed to continuing to maintain our prudent approach to financial management and to continue to operate in a manner that fully leverages the strength of our business model. This will allow us to continue to pursue growth in revenue, earnings, and ultimately long-term shareholder value.

I would now like to turn the call back to Elliot.

Thanks, Mike. I would like to note some additional developments in a couple of specific services. But before I do, I think it is important that I revisit the Tucows investment thesis. This is really predicated on three points. First, that the market for Internet services is growing, growing in a real sense, and will continue to grow for the foreseeable future. Second, that our chosen customer set is a big part of the Internet services distribution channel. And third, that we are the leading supplier of services to these customers.

Therefore, over time, we benefit from the growth in Internet services markets; we benefit from our customers growing their share of Internet services distribution; and we benefit from supplying the right services, while we do a better job around cross-selling, up-selling, and supporting the services we already sell, hopefully taking a bigger and bigger share of the end-user's spending through our network of VARs.

Our Start Service that I referred to earlier is a great example of how we can support our customers in strengthening their relationships with their customers, therefore contributing to taking a bigger part of the Internet services distribution pie.

I want to first talk about the relaunch of our content site. As I mentioned on our last call, our content business, the historical Tucows business, was one of the fastest-growing areas for Tucows in 2004, in that growth continued in the first quarter of 2005. Having successfully achieved our objective of substantially increasing revenue per page over the past few years, we turned our attention to the reinvigorating of the product offering itself, undertaking the first major redesign and repositioning of our software distribution site since its inception, which I will note is now over ten years ago.

Next week, we will launch a completely redesigned site, which features significantly expanded functionality, reflecting our new position. We are evolving the site from a downloads library to a resource that is geared to helping people use the Internet more effectively and the redesign is intended to support this evolution. Our expectation is that these improvements and the new course we're setting for the business will continue to fuel the growth of this revenue stream.

This work highlights another important element of our strategy going forward, the importance of usability to our business. We are paying much more attention to usability across all of our service offerings. In the next few quarters, we will focus on making all points of customer interaction more intuitive, more useful, and overall, more effective.

Imagine if we were able to make it even easier for end-users to share their digital images online, as we are trying to do with our blogware service. Imagine if end-users didn't have to deal with arcane concepts like C-Names and DMS and A record and MX record, but instead were able to use all of their services in a more intuitive fashion. We believe that if we can do this, it will drive usage, it would drive stickiness, and ultimately, it would drive revenue and profitability.

As an example, think about what Intuit did for small-business accounting. By making their applications understandable and easy to use for the average end-user, they took the lion's share of the market in small-business accounting. Their competitors were supplying software for people with presumed accounting knowledge. I would suggest that the providers of Internet services today are implicitly providing services for end-users with presumed technical knowledge. Unfortunately, generally that presumption is false.

Next, with respect to our billing business. In the next couple of weeks we will be launching the next version of our Platypus billing software. This new version is the first to fully integrate with our OpenSRS system and will allow our customers to efficiently bill for domain registrations as well as blogware, in addition to the services previously supported. The product is making progress towards meeting the complete needs of web hosting companies and Service Providers selling a broad range of Internet services.

In addition, it is worth noting that in the fourth quarter of last year, our sales efforts for billing software began focusing on monthly subscription sales as opposed to the traditional licensing and support pricing structure that usually accompanies software.

It is now the case that the bulk of new sales follow the monthly subscription structure, and we expect this trend to continue. We know that in the short-term it holds down revenue in this product line as we forego higher license fees for much lower monthly subscriptions. However, our experience is that customers like buying it this way, in that it ties the cost of the software to the benefit that they derive from it. For us, this pricing structure provides more predictability in the revenue stream, as well as tying revenue to the value for the customer.

More importantly, unlike most suppliers of billing software who do nothing else, we tend to have deeper relationships with our customers, with those relationships extending across a number of services. Subscription pricing gives us the luxury at a strategic level of focusing on the health of the relationship with the customer over the long-term. We are now finding that this is the case with all of our services.

Overwhelmingly, our competition as a wholesale supplier of Internet services to service providers comes from suppliers of a single service. When a customer is looking for domain registrations, we compete for the business with customers who are only wholesale registrars. When a customer is looking for anti-spam solution, we compete for the business with companies who supply only anti-spam solutions. When a customer is looking for a blogging tool, we compete for the business with customers who supply only a blogging tool.

Virtually without exception, we compete with suppliers of single services. The fact that we have deeper relationships with our customers gives us the ability to approach the relationship differently in terms of pricing and in terms of the provisioning of these services. This increases barriers to entry to our competition, it leads to higher switching costs for our customers, and it significantly increases our ability to sustain pricing pressures in any one of these services. We think the our focus on a customer set as opposed to a service set is increasingly providing us with a competitive advantage, especially as we launch additional services. Our business has always been built on relationships and relationships take time. And that time is, in and of itself, perhaps the most important barrier to entry in our business.

In conclusion, we have been investing in and retooling the business over the past few quarters and will continue to for the next couple of quarters. When I talk of retooling, I am referring to the introduction of numerous new services, of adapting business processes to the changes in the business, to doing important technical work on our platforms, and to addressing usability issues.

With the exception of the new services, this work is generally invisible to the outside world, but extremely important to the business. With the fundamentals of our business in place and performing well, we have been doing all of this while still recording record revenue and growing profitability. We will continue to focus on learning how to work our sales pipeline more effectively. We have no shortage of customers interested in what we have to offer and we can help them get better at selling services more quickly and effectively, while not materially increasing the service burdens on their businesses.

For some companies, such a retooling would lead to a marked impact on financial results. Again, however, our business model, based on monthly subscription revenue which continues to build over time, is so strong that we can do this while still demonstrating some growth.

When this is complete, I believe we will be in an even stronger position to drive incremental shareholder value. And with that, I would like to open the call to questions.

(OPERATOR INSTRUCTIONS) Gabriel Leung, Paradigm Capital.

Good afternoon. Nice quarter. Elliot, two questions for you. You talked a bit about your pricing model for some of your newer services. Just wondering if you can provide a brief summary on what the pricing environment is looking at like in the traditional domain name business?

We are finding that it has certainly been the case for the last couple of years, Gabriel, that there is ongoing pricing pressure in that business. In general, especially with some of the very largest accounts, we have to look at what we're doing in pricing on a continual basis.

One of the things that I have talked about in the past is that the way that we have dealt with this to make it more effective long-term and less impactful is to move to more of a service bureau pricing approach. So with many of our largest customers now, we have, in essence, a flat monthly fee that covers a set of transactions and a relatively small transaction cost above that amount. That has given us the ability to lock in a set of revenue and have some clear visibility around it, as well as allow the customers to be able to look at growing their businesses without constantly having to come back to us for price reductions.

So it is there, certainly, but we have really managed to take it to a place where there is not huge impact on our business going forward.

Okay, great. Second question I had is just regarding your obvious $50 million cash balance right now. Any thoughts on near-term cash usage, aside from some of the additional services you are going to be putting out over the course of the year?

We're always keeping an eye out for opportunities, Gabriel, and always look at M&A as something that for us will be opportunistic. In other words, we don't have a strategy or a business model that is predicated on consistent deal flow.

But you are certainly seeing an environment where the stock market broadly is a little bit off lately. Perhaps that could create some opportunities, and we are always keeping our heads up and trying to stay attuned to anything that might be out there.

If you had to prioritize potential (indiscernible) transaction, what would be your top two at this point?

I fear that if I answered that question, I would potentially drive up any price we might be able to garner. But I guess I would break them into two buckets certainly. For us, there can be tactical opportunities. Those would be things like a domain name registrar, where we could simply move a customer base onto our platform and really achieve some efficiencies.

And on a more strategic level, the types of things we're looking for would typically be things that would be more in the Service Provider's back office, perhaps to plug in some gaps in our existing offerings.

Okay, that's great. Thanks a lot. Good quarter.

(OPERATOR INSTRUCTIONS) Ross Color (ph), Baker (ph) Management.

Congrats on a nice quarter. Can you talk a little about the sales team right now and how you are segmenting it? Is it by different service or are all the sales guys versed and selling all the products?

There is a little bit of a mix. So we have the sales team broken up really into three groups. There are the folks who deal with the largest of our customer set. Then there's a group that specifically focuses on Europe. And we do have a fairly significant proportion of our business in Europe, so we have some account management on the ground there.

And the third group deals with the smaller Service Providers, and especially as it relates to the difference between the very largest customers and the small and medium-sized customers. They are very different sales processes. They will have attraction to different types of services.

Now, as it relates to specific service, we do have typically for each service one person in the sales team who is a service specialist, and that person will participate with the account managers or the people in the smaller reseller group when they are either doing demos or going out on very large opportunities.

With respect to the new services, Elliot, can you talk a little about the cross-selling opportunity and what the reaction has been from your customer base and maybe highlight some of the services that are experiencing some rapid and meaningful growth?

If I did that in reverse order, it is very clear, as I was mentioning on the call, blogware is now a cut above the rest of the services in terms of the interest that it is generating and the opportunities that we are seeing. Obviously, we are resourcing that accordingly.

The types of opportunity, though, they really are around that cross-sell or up-sell. We have one of our larger customers who came in the door through domain registration, probably a little bit under two years ago now, who has recently also gone live with both digital certificates and website building tools. So those happen to be the two that they chose.

We have had a few situations in the quarter where we have billing customers who now that they are -- they are relatively new to the Tucows customer set, and now they are exposed to some of these other opportunities. And especially as it relates to billing, we are very hopeful that this quarter will really see that expand as the billing software itself starts to make that easier, which is really the primary strategic driver behind getting into that business.

And you are really just seeing -- in general, the industry is moving away from Silos -- I'm an ISP, I'm a web hosting company, I sell domain names -- to really selling a bundle of services. So what you are seeing today, and you look at this with any Internet services retailer, what you tend to see today -- they may lead with a single service. It may be called a web hosting package. It may be called just an access package, but it tends to have a few things bundled into it.

And that increases the pressure on Service Providers to, for instance, have a good site-building tool in their portfolio. And those of the types of things -- what those companies really have to be good at is marketing and customer service. They don't have the time now to develop that second, third, fourth thing in-house.

You see, as customers demand more of ease-of-use with that free web space you have been giving me for five years, now I need a website building tool. We're finding customers who thought they could get away with dealing with an in-house anti-spam solution, for instance. As the volume of spam and the complexity of spam and phishing and pharming all start to pile on, they recognize that that is a zero sum game for them and that that takes away from their employees doing what they should be doing. And so we see then the need to find greater outsourcing.

And the one place that really stood out for me this quarter as a change was the recognition that we are a company that is focused on a customer set. We had a customer who was inside the shop from Asia. They traveled to see us because they were a big customer in one element of the business. And the thing that they most took away -- they made a point of stopping by my office on the way out and letting me know -- was that they were just so impressed that somebody was focused on Service Providers. That really is -- we tend to have an unloved customer set, and we're the only guys out there loving them. And that in and of itself is huge.

I think I have made the comment to you before, if I'm not mistaken, I'm the only public company CEO who will stand up and say, boy, our customers are small and medium-sized Service Providers and I am proud of it. So we are really starting to see some of that take root.

It sounds like a great revenue opportunity to cross-sell these new services, so congrats and good luck.

(indiscernible).

I was wondering if you could talk a little more specifically on this new version of Tucows that -- often we hear these relaunches and either they are just a few different JPEG files or they have gone too far on the other end and forgotten who their old customer was. Maybe if you could give me more detail.

I think there is a couple comments I'd make there. One is the "shame on us." We have had a very popular website that has been around, as I mentioned, for over ten years. And it also is not the largest business in the building. And I think because of that, we have neglected to some extent the usability and what I'd call level of professionalism around just website design and analytics that, frankly, I am not happy with and not proud of.

So about a year ago, we started down the road of thinking through how we could make that better. We actually now have usability skills inside the building. And I'm not talking about web designer who thinks they know how to lay out a web page. I'm talking about human factors and psychographics, true usability. So it really will be when it launches (technical difficulty) first time what I would describe as a professionally designed website. So that is kind of the making up for lost time.

In terms of sort of a little deeper dive on the what's new, one of the things that we have recognized again over the last year is that our classic raison d'etre, the downloading of shareware, is simply less material to typical Internet users today. Back when we first generated our place in that world, it was a much more important problem that we were solving. But what we recognized is that so much of what we were doing touches on things that are today real problems.

So I guess I could perhaps provide a little flavor -- things like more attention to spyware and its impact on users. And there's one thing I would note here, as you may have seen Eliot Spitzer bring a little attention to the spyware space recently. We have historically had an extremely user-friendly approach to the files that we offered. First of all, they are all rated and reviewed, virus checked, checked for spyware, checked for adware. We didn't offer titles like -- and I don't mean to single anybody out -- but like Kaaza and dozens of other titles that bundled a bunch of third party stuff inside it.

A lot of our competitors did offer those titles and it was to their business benefit. We chose to have a much more user-centric approach. And that is something that we need extend now and help users deal with the problems that have come out of a bunch of the spyware related pieces.

Another example is perhaps dealing with problems -- opportunities, usage as it relates to things like the iPod and iTunes and Music Online. It is much more focused on helping people use the Internet easier, as opposed to just downloading software. Does that make sense?

Yes, that gives me more flavor on it.

And by the way, we are going to launch, and like with anything we do, we will learn from that. So that is the start point. And if you have any specific suggestions, as always, I am happy to hear them.

I will be sure to take you up on that. You know that. And just one question for Mike. I was wondering if there is any move in the hedging area to just constantly try and hedge or is there a bet to be made on the continued weakness in the greenback?

It is something that we assess and monitor on a regular basis. We tend to be very sensitive to it. We do buy forward contracts on the Canadian dollar whenever we think it is appropriate. We had a series of contracts that expired at the end of March. Subsequent to the month end, we did take out new contracts until the end of May and are currently exploring whether we should in fact extend that to a further period within the year.

You might not have noticed, but we have had something of a political scandal up here in Canada, which has caused some weakness in the Canadian dollar. So it is something that we really do have to pay attention to. A lot of folks have their competitors' tickers in their stock ticker. I keep the Canadian dollar there.

Right. Perhaps this would cause too much of a logistical pain for such a small company, but just to move -- or grow your U.S. labor base so you have more of your cost structure in U.S. dollars. Or would that logistically be too much of a hassle?

It is less about logistics and more about span of control and it still is the case that labor is, generally speaking, less expensive here. I will remind you that we do have two U.S. offices, one in Flint, Michigan and one in Starkville, Mississippi, so we invite you to take the tour. So there is a little bit of that. But the U.S. dollar needs to still depreciate significantly before wage rates in Canada are not still something of a bargain.

Right, that makes sense. Last is this ICANN fee, the $0.25 fee. Can you just talk a little more specifically -- are you able to pass that on? And what do they do with that $0.25?

I refuse to answer the second question. We would have to book another hour for the conference call. With some of our bigger customers, the ones that we had gone to that service bureau type model with, or the ones that had more aggressive pricing, generally that fee was either explicitly or implicitly passed on. In other words, the way we would negotiate those deals are a flat monthly number, a small transaction cost, and both of those are on top of registry fee and ICANN fee. So it is implicit in those deals. And that covers a big chunk of our volume.

With the rest of the base, we were able to -- and we want to be fair with our customers around it. We generally passed on a little bit of it and then we ate most of it.

Okay.

And you're seeing even some of the very largest price competing retailers have started to pass along that fee.

So you think you'll be able to pass on more of it -- is that what you are saying?

It is becoming more prevalent in the industry is what I'm saying. Another bit of inside baseball as it relates to ICANN, and something that I have been pushing for inside of that process, where I am very active, is a broadening of the revenue base. So one of the things that did happen this quarter was the .NET contract was extended. Part of that was a change in the pricing such that now $0.75 of every .NET transaction will flow through to ICANN.

The way it works inside of ICANN is the registrars are basically the backstop for the financial burden. So anything that lessens the whole is going to, on some level, flow through to us.

Right.

But there is a lot of variables at play there. You get into the U.N. and WISSIS (ph) and WIGIG (ph) and all sorts of acronyms that you really don't want to know about.

Okay. Thanks for your time.

There are no further questions registered. I would like to turn the meeting back over to Mr. Noss.

Thank you, operator. I would like to thank everyone for joining us again today and we look forward to speaking with you at a time of our next conference call.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a great day.