Tucows Inc (TCX) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Tucows' first-quarter 2014 conference call.

Earlier this afternoon, Tucows issued a news release reporting its financial results for the first quarter. That news release and the financial statements are available on the Company's website at tucows.com under the investors heading.

Please note that today's call is being broadcast live over the Internet and will be archived for replay both by telephone and via the Internet beginning approximately one hour following the completion of this call. Details on how to access the replays are available in today's news release.

Before we begin, let me remind you that matters the Company will be discussing include forward-looking statements and, as such, are subject to risks and uncertainties that could cause the 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 Form 10-K and Form 10-Q. The Company urges you to read its security filings for a full description of the risk factors applicable for its business.

I would now like to turn the call over to Tucows' President and Chief Executive Officer, Mr. Elliot Noss. Please go ahead, Mr. Noss.

Thank you, Operator, and thanks, everyone, for joining us today. With me is our Chief Financial Officer, Michael Cooperman.

As per our usual format, I will begin today's call with an overview of the financial and operational highlights for the quarter. Mike will then review our financial results for the quarter in detail, and I will return with some closing thoughts before opening the call to questions.

First, a quick note regarding our disclosure. Ting targets a different market than our domains business, and having now reached a sufficient size, about one-quarter of our consolidated gross margin in Q1 and growing rapidly, we have begun breaking it out separately for the first time this quarter under the heading network access services. All of our domains revenue streams are now reported under the umbrella of domains services.

The first quarter of 2014 once again showed the consistency and reliability of our business. Our domains services businesses -- wholesale, retail, and portfolio -- continued to deliver solid performance. Our retail channel, Hover, in particular had another strong quarter with nearly 25% year-over-year growth in revenue. Ting continued its momentum and outstanding growth with another record quarter for customer and account additions. All of this contributed to year-over-year growth in consolidated revenue of 15% to $34.4 million.

Drilling down into each of our businesses, Ting had another great quarter. It's been now just over two years since the launch of Ting, and Ting is now about three-quarters the size of our wholesale domains business in terms of gross margin dollars. And we expect it to surpass our wholesale domains business to become the largest contributor to gross margin later this year.

And remember that our domains business is no slouch. It is an organically grown $100 million in revenue market leader.

Q1 was another record quarter for customer growth at Ting. We added nearly 13,000 accounts net and more than 20,000 devices, bringing our totals to more than 61,000 accounts and 94,000 devices at the end of March.

Subsequent to quarter-end and well prior to this call, we surpassed the 100,000-device milestone. I remember and some of you probably do, too, that when we launched Ting, I used to ask investors to imagine just 100,000 devices and think of the positive impact it would have on our business.

Importantly, even after lowering our data pricing in February, our gross margin percentage remains in our targeted 45% to 50% range. Our annual customer contribution and customer acquisition costs also continue to be right where we would like them. Of course, this price decrease did cost us something in the short term, but we feel the investment was well worth it.

The growing list of high-end devices that can be brought to our service continues to fuel additions and enhance the Ting experience. Our most popular devices, the iPhone 4, 4s, and 5, the Samsung Galaxy, and the Nexus 5 all offer the sort of quality that costs $600 just a year ago for now under $400 and as low as $200 in the used market or, in the case of the Nexus 5, in the Google Play store.

We recently added the Samsung Galaxy S4 and HTC One to the list of eligible Ting devices, and we look forward to adding more great values at a wide range of price levels throughout the year. We note that we've been selling the S4 and HTC One new since launch and that this now allows those who buy these devices in the secondary market to bring them over.

We mentioned last quarter that we would be experimenting with broader advertising to see if we can affordably accelerate our brand awareness and consideration. In the end, these experiments validated our hypothesis that people tend to tune out traditional paid placements and that brands tend to overpay for them. It has confirmed our belief in social recommendations.

Meanwhile, we continue to see growing traffic from new visitors every month, the best indicator of awareness and consideration. So we are encouraged to keep investing the bulk of our budget and, more importantly, our effort in maintaining our core competitive advantages -- low rates, usable interfaces, and outstanding customer support.

We have also identified a short list of strategic opportunities that we think could give us the greatest return on our marketing effort. These include doing a better job helping people buy and sell used phones and doing a better job of encouraging and facilitating customer referrals. In addition, we are going to re-examine whether we can make headway selling Ting to small businesses.

In the coming months, we will launch new product features, content, promotions, sales programs, and partnerships aimed at helping us capitalize on each of these exciting opportunities.

For nine straight quarters since the launch of Ting, we have posted quarter-over-quarter growth in absolute net customer adds. That feat gets tougher to repeat as we get larger and the same rate of churn starts to materially impact the customer loss in absolute numbers. And it gets particularly tough as we head into the second and third quarters, which mobile industry experts tell us are seasonally slow.

We had a relatively slow April, although May seems to have bounced back. Our best guess right now would put Q2 adds somewhere between those of Q3 and Q4 of last year. That is still growing our customer base by well over 15% in the quarter, a remarkable rate of growth for any business.

The other part of our business, domain services, continued to perform well in Q1. In OpenSRS, our wholesale channel, key metrics, including new registrations and domain visitor management, were relatively flat on a year-over-year basis, which was in line with our expectations. Average gross margin has begun to tick up and should continue to do so in coming quarters, with higher-margin ccTLDs and new gTLDs growing as a portion of our total mix.

We also continue to see operating efficiencies as resources are shared across or reallocated to the growing network access [base].

Q1 saw the first real quarter of new gTLD introductions. There are now more than 250 new extensions available to the public, although I will note that these are still only those with no contention or where contention was quickly resolved.

One of the metrics that most interests us at a market level is the ratio of new gTLD sales to those of .com and .net. Here, we are just taking easily accessible numbers, the total new registrations in new gTLDs and the publicly-reported new registrations in .com and .net.

In Q1, new gTLDs accounted for about 6.5% of the total new sales. On one hand, this includes the launch of each of these new gTLDs, which will tend to be larger than their run rate. On the other hand, these certainly were not the most highly anticipated or most attractive new gTLDs. We have no idea what to expect in Q2, but that number does seem quite encouraging for the program as a whole.

Hover's new gTLD registrations were right around that market average of 6.5% of total sales. Given that we do not participate in any of the land rushes and that we have more attractive margins, especially relative to the businesses that were driving significant units, we are quite pleased with that performance.

OpenSRS was in the 2% to 3% range in Q1 and trending upwards to 3% to 4% in April and May. This is consistent with our historical performance in new TLD launches as our broad network of resellers integrate the new offerings. The numbers we watch most closely here in the wholesale business are resale adoption rates -- our reseller adoption rates, and there, we are seeing exactly the trends we want to see.

Again, those numbers are not market share numbers, but percent of our own new registrations coming from the new extensions.

Looking more at Hover now, it continued its steady trend of 20%-plus growth year over year. Hover's value proposition as a simple, no-hassle domains and email solution with outstanding customer service continues to attract and keep customers.

Our customer count at the end of the year was up 12% year over year. New registrations were especially robust during Q1, up 24% year over year and 30% sequentially as we benefited from some very public missteps by a couple of our competitors.

Renewals of domains were up 39% and the renewal rate continues to be healthy. The number of transfers in continues to be several times larger than the number of transfers out.

Hover continues to be OpenSRS' most eager reseller, adding new gTLDs weekly. Our retail channel now offers more than 120 new TLDs, and by the end of the year, we expect to offer a couple of hundred.

The launch of new gTLDs presents the first significant shift in domain sales in more than a decade. For years, we have assumed that most Hover visitors would not find a suitable domain in their first few attempts, and therefore focused much of the customer experience on helping them find the right one. With the launch of new gTLDs, we now believe most people will be able to find a suitable domain quickly and we are rethinking our search results accordingly. This work will continue through the year.

Moving on to the third channel in domain services, our portfolio. Portfolio business continued its return to 2012 and early 2013 levels after a dip in the middle of 2013. We also recently launched an aggressive program of experimentation on our portfolio landing pages that should push more traffic and sales through our network partners.

I would now like to turn the call over to Mike to review our financial results for the quarter in greater detail. Mike?

Thanks, Elliot.

As Elliot mentioned, Ting has now grown to the size where it is a more meaningful contributor to our gross margin fulfillment. Given that it can be differentiated from our domain service offerings by both the market it serves and the regulatory environment in which it operates, beginning this quarter we have begun breaking that revenue stream out separately in our financials under the heading network access services. We will continue to break out our wholesale, retail, and portfolio revenue streams in the same detail we have provided in the past, under the heading domain services.

This quarter saw another quarter of year-over-year topline growth, with total revenue up $4.4 million, or 15%, to $34.4 million, compared with $7 million for Q1 of last year. Cost of revenues before network costs were $24.3 million, up $2.2 million, or 10%, from $22.1 million. This increase resulted primarily from our supporting higher sales of Ting devices and services.

Gross margin before network costs increased by $2.2 million, or 28%, to $10.1 million when compared to the first quarter of last year. Gross margin as a percentage of net revenue increased to 29% from 26% when compared to Q1 of last year. These increases were largely driven by Ting's performance.

I will now review gross margin performance in each of our service categories, beginning with our domain services business. Gross margin for domain services, which, again, includes our wholesale, retail, and portfolio revenue streams, was essentially unchanged from Q1 of last year at $7.7 million.

Gross margin for wholesale, which includes domains and other value-added services, decreased marginally by less than $100,000, or 3%, to $5.5 million from $5.6 million for the same quarter of last year. The domains component of wholesale was down less than 1% at $3.4 million and the value-added services component was down 3% at $2.1 million. As a percentage of revenue, gross margin from wholesale services was also unchanged at 23%.

Gross margin for retail services, which now consists solely of Hover, increased $200,000, or 17%, to $1.4 million from $1.2 million for the first quarter of last year. The increase is the result of our continued success in adding new customers and growing sales to our existing customers.

As a percentage of revenue, gross margin for retail services was 57%, compared to 61% for Q1 last year. The results of our undertaking campaign, so slightly more aggressive promotional pricing in the first quarter of this year.

Gross margin for portfolio services was $810,000, down $123,000, or 13%, from $933,000 for the first quarter of last year. On a percentage basis, gross margins in our portfolio group were 37%, down from 82% for Q1 of 2013.

Turning to costs, network expenses for the first quarter of this year were $1.3 million, down $100,000, or 7%, from $1.4 million for the same period a year ago. The decrease reflects our continuing ability to improve efficiencies and operating and managing our colocation facilities.

Other operating expenses for Q1 were $8 million, up $1.8 million, or 29%, from $6.2 million for the same period last year. The increase primarily the result of three factors. First, we invested an incremental $1.2 million when compared to the first quarter of last year in workforce, marketing, and other costs related to acquiring and supporting Ting customers.

I think it's important to once again remind listeners that these higher costs are a function of Ting's success as our quarterly customer adds are still relatively large as a proportion of the overall base, thus our costs are relatively high as a proportion of revenue. As the size of the additions relative to the base continues to go down, our customer acquisition costs relative to revenue will decrease.

Second, we incurred a $317,000 higher loss on foreign currency forward contracts in Q1 of this year compared to last year.

And third, as part of our normal portfolio renewal process, during the quarter we assessed that certain domain names acquired in the June 2006 acquisition of Mailbank.com Inc. should not be renewed and were allowed to expire. Accordingly, these domain names, with a book value of $250,000, have been written off and recorded as an impairment to the indefinite life intangible assets during the quarter. As a percentage of revenue, total operating expenses increased 23% from 21%.

Net income for the first quarter of 2014 was $477,000, or $0.04 per share, compared with $77,000, or $0.01 per share, for the same period of last year. I will remind you that our per-share figures for both periods reflect the 1-for-4 reverse stock split that we completed in December 2013.

Cash and cash equivalents at the end of the first quarter of 2014 were $13.5 million, up from $12.4 million at the end of the fourth quarter of 2013 and $4.3 million at the end of the first quarter of 2013. We used net cash in operating activities of $39,000. I would note for you that net cash from operating activities included an excess tax benefit from share-based compensation expenses of $1 million that arose in the exercise of stock options during Q1 of 2014.

Cash flow from financing activities reflects the excess tax benefit from share-based compensation expenses as a corresponding inflow.

In addition, we generated $911,000 from the exercise of stock options. These sources of funds were partially offset by our repaying $617,000 of our bank line, our repurchasing $82,000 of our stock through our recently announced stock buyback program, and our investing $69,000 in equipment purchases.

Deferred revenue at the end of the first quarter of 2014 was $72.8 million, up slightly from $72.4 million when compared to the first quarter of last year, but was up by $2.8 million, or 4%, from $70 million when compared to the fourth quarter of 2013.

And with that, I would now like to turn the call back to Elliot. Elliot?

Thanks, Mike.

With the movement in the Canadian dollar over the past six or so months, I wanted to take this opportunity to provide an update on our hedging program.

As a reminder, we generate revenue in US dollars, but the majority of our operating expenses are in Canadian dollars, and therefore we engage in foreign-exchange hedging to provide certainty around future costs.

The appreciation of the Canadian dollar has been a bit of a headwind, really, over the last decade or so as our expenses were that much higher relative to our revenues. You see that reflected in our 2014 numbers and our guidance. However, with the recent weakening of the Canadian dollar, we now have a bit of a tailwind.

We have typically hedged out 18 months or so, but are now only hedged through the end of 2014. Thus, if the foreign-exchange rate stays more or less in its current range, EBITDA could benefit by as much as $1 million to $1.5 million in 2015, relative to this year.

We note this in the context of our continuing commitment to return capital to shareholders. During Q1, we announced the annual renewal of our normal course stock buyback program. This is essentially the same program we have had in place for a number of years now. It is put in place and reviewed annually.

This year, we have upped the size of the program to $20 million, which is twice as large as it has previously been. The larger amount is reflective of our larger market cap and the larger dollar volume of shares traded.

Once these programs are in place, what we then do on a quarterly basis at the Board level is discuss whether we are going to be in the market during the quarter and at what price range. Sometimes we have those discussions and the market moves away from us and we might not reconvene as a Board to revisit those targets inside of the (multiple speakers)

As a result, investors should never read too much into what we have done in terms of buybacks in any particular quarter. We remain committed to returning capital to shareholders and our buybacks remain the best means by which to do this. Of course, this open market program is in addition to any Dutch tenders we may choose to initiate.

Looking out the remainder of the year, we are quite comfortable reiterating our guidance for 2014 at $13 million to $13.5 million. The first quarter of 2014 was right on track. In each unit of our domains business, there are smart projects underway that should continue to help make the most out of our relatively mature business. And with Ting, there is still so much blue ocean that each quarter of learning and adapting continues to be exciting.

And with that I would like to open the call to questions. Operator?

(Operator Instructions). Hubert Mak, Cormark Securities.

Just maybe I will start off with the Ting. Obviously, it was a good supp growth year. And I think I just heard, obviously, you were going to be a little bit seasonally softer this Q2.

But what is your thinking in the context of your strategy that you guys are look like to roll out in terms of targeting enterprise and all the other strategy it looks like you're going to be put in place? Where do you see Q4 ending, I guess, maybe that's the better metrics, because I think that's usually the highest quarter, I think, in terms of supp adds. So do you think that go back to this quarter level or -- if not higher, or what is your thinking there?

Part of the fun and challenge of this business is we're really in there every day and every week just slugging it out. So, I am really thinking about this quarter, not Q4.

I want to make a couple of more comments there. First, we didn't say enterprise. I didn't say enterprise. I said small business.

Sorry, okay. Right.

Enterprise is a very particular creature in terms of sales effort and the way you go about it, et cetera. The things we are doing are really focused on small business.

So many of our customers work in small businesses and we need to be able to take the love we get at that direct level and figure out a way to channel us into those small businesses. And I think that we are still new enough in this business that we are -- we don't have enough experience to say, hey, seasonality or here's what it's going to be two or three or four quarters out, and the base is still small enough relative to the number of adds every quarter that it is not something we want to fall into.

And I can tell you, I said on the call, April was relatively soft and we saw a pickup in May. It's a great example. If I was doing this call three weeks ago, I probably would have been more negative than I am here just two or three weeks later and seeing the trends.

So, two or three weeks from now, who knows? I may be -- I might have been more buoyant. So, it's that difficult at this early stage of a young business.

Okay, and then just maybe on the financials then. Are you able to break down what the hardware revenue is since you guys broke out the Ting services?

Mike, are you -- did you make any comments about the hardware revenue?

At this stage, we haven't broken out any of the hardware revenue, so I don't have those stats here. But it is something we could consider for future calls.

That's not a terrible idea, Hubert, because again, you know the way we view that revenue as a pass-through, and I think that it would make it cleaner for everyone.

What we can say to you -- what we can say is that we do not look at hardware as a traditional generator of gross margin for ourselves. We rather look at it as an enabler of us getting to the service revenue. So there are no meaningful contributions to gross margin in hardware. It is rather there are specific costs [for] a bit of money.

Okay. I know I asked this question before, but I just circle back again. I know that most of the US certainly have been, obviously, increasingly more competitive, especially in the pre-pay market. Are you seeing any direct impact on that or not at all, like are you still trying to gain share here?

It is very tough to parse it, and so where we had to do that is anecdotally, and I don't -- when you say especially in the prepaid market, we still think that our competition comes from primarily, and the important place to keep focus are AT&T and Verizon. I think if anything has had an impact competitively, it has been T-Mobile, but there is nothing really that I can quantify.

We're really -- I think the other MVNOs, especially the very low end of the prepaid market, we don't know that we are seeing a lot of impact there.

Okay. Switching over to domain, correct me if I am wrong, I think I heard -- am I right that you are seeing 3% to 4% growth coming back here and going back in the back half of the year? Is that what you are seeing?

I did not say that. The 3% to 4% was simply a comment about what wholesalers are seeing with the percentage of new gTLDs --

Okay.

-- in -- so the percentage of new sales coming from new gTLDs.

I wanted to -- it is a number we are starting to track internally here, so you can look at -- there are public services for the zone filed in new gTLDs and then VeriSign reports their .com and .net numbers, which are a pretty good proxy for the existing gTLD market.

Right.

And comparing those two numbers, we want to put that out and have you guys follow it along with us, in terms of the impact that new gTLDs are having or not.

Okay. So I think, obviously, you had mentioned that you guys are seeing 6.5% in terms of the new gTLD. So, what is your outlook year here -- in terms of domain market here? Where do you see the growth coming in in the context of the new gTLD?

I think it's performing to our expectation. In terms of our planning, the program is doing what we had hoped for. In terms of contribution, I think that the contribution that we are seeing from the whole domains business, and, in fact, each of the elements of the business, is right about where we want it.

So it is right about where we have been talking about growth in terms of profitability. So we've been talking about the low to mid-single digit type of range for the wholesale business. That's what we are seeing.

Okay. And in terms of the bigger impact of the new gTLD, are we still thinking maybe it's more in the 2015 or later in 2015 or is it (multiple speakers)

Yes. I think that what we -- absolutely, you are seeing -- again, I am talking about 6.5% and that's just in new. Remember that where the bulk of the revenue and gross margin comes from is in renewals, right? So 6.5% of new, which is, relatively speaking, a smaller percentage of the whole pie, right? So, what I am trying to do is put that out there so we can see how this is going to come along.

Okay. And then --

It is not -- Hubert, sorry to jump in. It's not just 2015. 2015, 2016, 2017 is where we will see that ramping in and really layering in some growth.

Right, okay. And then just on the expenses, is there a way how you guys -- obviously expenses, it looks like -- I think it ticked up a little here in terms of OpEx. Is this -- do you think this is a baseline level that we can use or do you think there will be some sort of continued increase here or do you think it is going to be flat circling forward?

Yes, I think the only thing you're going to see really moving OpEx in any sort of way that is going to jump out to you is going to be customer growth in Ting.

Okay. Okay. But I mean, arguably, then -- so I would see a continued increase along with -- like I'm just trying to figure out the (multiple speakers)

No, no, remember that costs grow with the level of growth. So if we added the same level of customers, you would see the same level of spend. That's not growing with the base; that's growing with the rate of growth.

Okay. And then, lastly, just on the tax, Mike, it looks like it is 35%. Is that the rate that we think we should use going forward? In terms of the tax rate?

Around 34% would be a prudent rate to use.

Sorry, sorry, I missed that. What was the number again?

Around 34%.

(multiple speakers) 34% would be a prudent rate to use.

He is shaving 1% there.

Okay, okay, thank you.

Ryan Downie, Sidoti & Company.

Taking a look at the Hover gross margin, it was down as a percentage of revenues because of some promotional activity. Can we expect that to extend throughout the rest of the year?

I think you'll see a little bit of that. We don't know. I think we have got to take a step back. We will look at the impact, how positive is the impact in? What does it [do to our] customers? And you're going to see some of that, some experimentation, as the range of gTLDs come out.

So, there is going to be this competing thing with promotions and mix, and it's really tough to say where that is going to come out.

Okay. Regarding taking Ting to some small business customers, is there a material change in the types of marketing strategies you guys are going to employ or does that just work because it is similar to what you would do for consumers?

I think one of the things I was trying to put an emphasis on, more in my voice than the words on the call, was this will be less about money and more about effort. So, when we did some of the things we did through December, January, February, those programs that I have talked about, all of those programs took people's time and effort on top of the dollars that went into them. So you're going to see some of that time and effort focused on some small business programs.

So that could -- it's a whole range of things. That could -- will be things like programs into the base to try and leverage referrals up into small businesses where people are employed. That will be effort around identifying small business niches where we are actually making a little bit of traction and then trying to go further on those niches.

So, it is going to be about making an effort there.

Okay. More generally on the domain registration side, we have seen the ICANN conference was earlier this quarter, and then there was the [Netmoon] deal in Brazil. Could you maybe just comment on how you see the discussions on Internet governance playing out and if that is favorable for you guys so far?

Sure. So, I would start by saying those discussions, absent some real negative material change, won't have much of an effect on us as a business. They do, however, have great importance for all of us for the Internet.

I think the Netmoon deal to me not really surprisingly -- I don't know how closely you were following it, but the final report was actually leaked before the conference even started. So, it was little bit of a set piece. But there was a fairly rigorous reinforcement and blessing of multi-stakeholder.

I can tell you that we have the next ICANN meeting in London towards the end of June, and the agenda was changed recently. A public forum is a big punctuation mark on the ICANN meeting, and fully half of the public forum has been hived off to discuss all of these Internet governance issues.

So, I think what you're going to see -- this is a long-term dialogue. You are really talking about a very long-term trend in governance. This really transcends the Internet and is really about -- I don't want to be too grand -- but the next phase of democracy, and so I think you are not going to see this happen in quarters or even years.

All right, thanks. That's all for me.

Shai Dardashti, DCM.

I actually have six questions. I would like to ask two and then go back in the queue to ask the other four.

My first question is that you have reached 100,000 customers at Ting from a standing start. I would imagine that going from 100,000 to 200,000 customers is actually easier than going from 0 to 100. So I am curious to what degree you find that having a larger customer base actually makes it easier to gain additional customers, please?

A question I haven't thought about. That's good. I think I probably have two comments. All of the -- so much of the machinery, the day-to-day business processes, are in place. We have tried a number of things now. Like any, from my perspective, any good business, we have sorted through a bunch of things that worked and didn't. So there is certainly -- there is efficiencies that come from all that.

A lot of the vagaries are out. I don't know that there -- we didn't really have a lot of who are you and will you still be in business in a year? That might be because there is some familiarity with Tucows. That might be because we have always done a fairly professional level of design and usability. So, I don't know there is much benefit there.

I do think, like anything else, it is more of a well-oiled machine. I would certainly be disappointed if we didn't get to 200,000 a little bit quicker than we got to 1,000 -- to the first 100,000.

On the other side, though, I mentioned on the call that, sure, there is some law of big numbers, and churn just on an absolute numbers basis starts to become more of a headwind. X% off of 10,000 is a much smaller number than X% off of 100,000. And so, each quarter to deliver that same net number, higher net number, you got to do a little bit and a little bit better.

It is a problem I am thrilled to have and it's a problem I hope gets a lot worse. But that's also a reality of the math.

So, I think that's what sitting in front of us. We have always considered it hard work and we have got to show up every day. I think you heard in the beginning of the questions, I am not looking at Q4. I've got the second half of Q2 to deal with.

So, I hope that helps.

Okay, and my second question is that ignoring Sprint completely, on my math Ting presently has a market share of 4 basis points. I'm curious what is the subscriber capacity, or I guess the market share, that the current infrastructure within Tucows can support as more people come to realize just how wonderful Ting is?

Thank you for the kind comment. Because we don't run a network, so I will say that to go towards that, ignoring Sprint completely, boy, I am sure they would be some natural limit in speed. It would probably be tough to digest 0.5 million customers next quarter. I would love to try. But there is not a lot of practical limits there.

We recently opened a new customer service center in St Catharines, so we have laid in some additional infrastructure there. We think that there is a good pipeline of customer service people, which is really the people element that scale deals with.

There is nothing in the infrastructure around network or website or product that changes it all. The engineering and the product design is the same for us as it is for Verizon or AT&T, in most respects. So, I don't think that there is a lot there in terms of practical limit.

Okay, I will go back in the queue. Thank you.

Aram Fuchs, Fertilemind Capital.

The reducing the forward contract is a big move. Can you just give a little more detail? It could produce more EBITDA, but it obviously just takes currency risk onto the balance sheet?

That's right. That's right.

I think that, look, we have always -- you heard me describe it in this call as we hedge to give ourselves runway. It has really been the case that all voices have been talking about a declining dollar for the last six to 12 months, and so we have just been letting contracts come off.

We will probably start to pick them back up again. I don't want you to hear me say we plan to go naked and continue that way. We are just looking for the next -- for the right spot to start bringing them back on again.

I like having that 12 to 18 months in leadtime, and I can tell you that I don't think twice about the fact that, for instance, as we report a quarter like we did that I have got a currency loss. I managed with certainty and knew exactly what I was doing as I was pulling the levers through the quarters. So it was great. It didn't bother me at all.

What I wanted to do there is to just level the playing field to -- because we were departing from our usual practice and I just wanted everybody to be aware of it.

Right, and aren't you becoming more naturally hedged with your Sprint payments and the labor for Ting, for the CSRs on Ting is US-based, right?

No, no, they are Canadian. So we're not becoming more naturally hedged, actually. There is nothing in that -- when you say the payment to Sprint, you know that I am just taking -- I'm looking at the gross margin dollars, so and --

Okay, the CSRs, I thought they were run out of the Mississippi office?

No, no. We're doing a little bit of the fulfillment out of Mississippi, but there is not a lot of additional headcount that goes along with that. We have the office down there already.

St Catharines, where the new office has opened up, is a stone's throw from the border, but it is still Canadian dollars. And I can tell you we looked at a couple of places on each side of the border. We picked St Catharines before the recent fall of the dollar, and that just turned out to be lucky, and it's always better to be lucky than good. So we picked up a little added benefit there.

Right. And your attempt to go to small business here, the first one through the OpenSRS resellers didn't really work because someone who purchases the wholesale domain service is not the same as someone who does the cell phone. I didn't quite understand what the difference will be in your attack this way. Is it an attempt to get the viral marketing going like you did on the consumer side so successfully?

Yes, I think it's -- now it starts to leverage our existing customer base into small businesses, and I think -- and direct a little more of the materials and messaging towards small businesses uniquely. I think you can see some of that on the website already if you dig around, and I can [bounce] you some links after the call, if you like.

And it is -- I thought about referencing in the call, and I mentioned that sort of back to the initial efforts around small business, but I thought I would just end up taking up too much air with that. But that's exactly right. We looked at -- hey, we saw that as a very real and very important opportunity when we launched Ting, and we talked a lot about it in the very first couple of calls, the very early days there.

It didn't work. We got away from it and we looked at opportunities, and the couple small businesses, the few relationships that we did have and that we do have in the base, they were loving it, and so we thought it was time to relook at that.

Great, thanks a lot.

Patrick Retzer, Retzer Capital.

Congratulations on a great quarter. I had one question. You have no contracts and AT&T has proven in their latest quarter that consumers love that. You only pay for what you use. Everybody loves that.

But device purchase wise, I noticed on your website -- you are not shipping it yet, but you have got a 4G/LTE smartphone for under $200 that you will be shipping later this month. I got to believe that's a big deal. Do you have any thoughts on that? Have you gotten any initial response to that? What can you tell me?

Sure. So, there's -- that's a device that we are hoping to have in a week or two where we are not used to dealing with the terrible things called supply chains in the markets that we came from, so we were hoping to have that device in a week or two.

It is a device on Coolpad. It's probably going to be in the market at $199. It's really the best $200 -- best sub $200 device that we've seen. PC Magazine did a review on it. They did a review on the Ting Coolpad device. It's interesting, so we definitely think that it's at the right price point for our customers. It is certainly the best new sub $200 device that we have seen that we would offer.

It is certainly the best low-priced LTE device that we have offered. So, we are hoping that this is -- and we're going to make a big deal about it, so we're hoping that it's going to have an impact.

There is two other thoughts that I will add. One is we never know, and we've tried to triangulate this a couple different ways, how much an impact something like that will be as a replacement and how much it will be in terms of attracting new customers. So it could just be somebody buying that instead of a used 4s or instead of a used Galaxy S3. So we don't -- it's always tough to know what kind of impact that's going to have.

The second thing is there's this really interesting bit that we've noticed where people love to talk about the north of $500 devices in our customer base, but then end up buying the sub $200 devices. So we are trying to think about how to capture that and do something with it.

Okay, well, it sounds encouraging. Based on my daughter's experience, these are definitely consumable devices, so I would think lower priced is better. But at any rate, keep up the great work and congratulations.

Jamie DeYoung, Goudy Park Capital.

Hi, Elliot, this is Roy Liao in for Jamie. Just quick question on customer acquisition costs and lifetime value. I know in the past you've mentioned customer acquisition costs as around $80, and on the last call, you said it might move up to $110. Wondering what we are seeing there for this quarter.

Yes, so I would say comfortably below $100. I have never said $80. And so, you saw -- you can just do a little math and see. It drifted up a little bit this quarter. As we have told you, that stuff didn't really take.

So you did see it trending back down to where it has been. It didn't even get as high as I thought it might last quarter, and now you're going to see it go back to where it has historically been.

Okay, and then how about -- you briefly mentioned some anecdotal numbers around churn, and similar to AT&T then Verizon after the first month. Is that still in line? Are you looking still at somewhere around anywhere from, let's say, a 4- to 5-year type of retention rate per customer? Are we in the same ballpark?

There is a couple of things, so let me say, yes, 4- to 5-year retention rates aren't far off, but I do want to say I noticed and I had this played back both in a written article that I saw and in a couple comments like the one you just made.

There was a mistake, and I am glad you brought it up, so I can -- give me an excuse to correct it on the call. There was a mistake in the Seeking Alpha transcript that was posted. I think that's where you got what you just said, which was they said it was around Verizon and AT&T after the first 30 days.

But what I said on the call was that we are higher than -- we will always be a little bit higher than Verizon or AT&T, and we're in line with some of the other bigger carriers and better than most MVNOs, at least in terms of what we're hearing with our channel checks. They wrote that as the same as, instead of not as good as.

Okay (multiple speakers)

Glad you gave me a chance to correct it. But if your model is in that 4- or 5-year range, you ain't too far off.

Okay. Then, so, are we safe to assume, given that you are charging maybe around $[300], $[350] a customer a year that the lifetime value is still around the $1,400 range (multiple speakers)

I am not -- I don't do my math like that because I want to see where -- so, there is a couple of different pieces. When I say I don't do my math like that, I don't like calculating lifetime value, because I want to -- I would rather instead just look at payback, and there is two reasons for that.

One, I will be a lot more comfortable putting out a churn number when the Sprint network, hopefully, settles down in terms of having an impact over the next couple quarters. I listen to their calls with great interest and I am looking forward to the call where they say our network is no longer having an impact on churn, because when it impacts them, it impacts us. So, that's point number one.

Point number two is I am watching the cohort data pretty closely, and we do see that over time people's usage of an account goes up slightly. The number of devices on an account goes up. So, that would suggest that you can't really calculate the lifetime value based on churn.

Remember the numbers that I put out in terms of both churn and annual contribution are from accounts, not devices. So if we see that account behavior changing and growing over time, then I want to see what that settles down into. And I certainly can't guess what it is going to be like. That's a 3- or 4- or 5-year mark, when we haven't been in business that long.

Okay. But your assumption is that it is going to improve as opposed to it is going to get worse, right?

Yes, I have seen nothing to indicate otherwise. That's right.

Okay. And then, you mentioned some comments about T-Mobile lowering prices. Your customers are still saving a significant amount even over T-Mobile, right?

Yes, they are. What you see is you see T-Mobile start to eat up some of that mind share or some of that voice share, almost. And so, when people read about T-Mobile leading a pricing revolution or things like that, we imagine that will have an impact, right? It's all anecdotal at that point.

Okay. And then, given Ting growth, do you have any -- can you give us a ballpark around how that flows down into EBITDA? I know expenses -- operating expenses were a little higher this quarter. Going into 2015, could we see Ting be just as big, not from just only a gross margin perspective, but an EBITDA perspective as well?

I feel like I am just comfortable, because it's only been a few quarters, giving guidance for 2014. You wouldn't be able to press me into 2015.

I am trying to and will continue to give enough visibility into the Ting numbers where you can play around with assumptions and start to see how those numbers will roll pretty nicely.

Okay, okay. And then (multiple speakers)

But, as always, I am happy to walk you through a bunch of those variables.

Okay. And then, the last one for me, the additional expense this quarter due to Ting, I think it was slightly north of $1 million. Is part of that one time, the buildout of the new customer facility, the split between the Ting and Hover customer service, or is that the base rate going forward?

I think you are seeing a little bit of those two things when you're looking at period comparisons, both the things you mentioned, and then you are seeing the growth. As you see that going forward, you are going to be able to have, at least on a quarter-over-quarter basis, cleaner comparisons.

Okay, okay, got it. Great. Thanks again, great performance.

There are no further questions at this time. I turn the call back over to Mr. Noss.

Thanks very much and we look forward to speaking with you all next quarter.

This concludes today's conference call. You may now disconnect.