Tucows Inc (TCX) 2016 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Tucows' fourth quarter 2016 conference call. Earlier today, Tucows issued a news release reporting its financial results for the fourth 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 1 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 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 read, Mr. Noss.

Thank you, operator. And thanks, everyone, for joining us today. With me is our Chief Financial Officer, Mike Cooperman. For our call today, I'll begin with an overview of the financial and operational highlights for the fourth quarter, Mike will then provide a detailed review of our financial results and I'll return with some closing thoughts before we open things up for questions.

The fourth quarter saw another strong financial performance, capping off a record year for our company. Revenue for Q4 grew 9% year over year to $48.8 million, and for the year, grew 11% to just under $190 million, driven by solid growth in both Ting Mobile and Domain Services. Net income for the quarter was $2.8 million or $0.27 a share but before onetime items that Michael will speak about later, it increased 12% year on year to $3.5 million or $0.33 a share. For the year, net income grew 41% to $16.1 million or $1.53 a share. And adjusted EBITDA grew 33% to $7.3 million and 44% to $30.1 million for the quarter and year respectively, as a result of the significant operating leverage in our business. We also continued to generate strong cash flow from operations, which was $9 million and $22 million for the quarter and year respectively.

Given our recent acquisition, I'm going to break from our standard format a bit and begin our review of the various businesses with domains, starting with our recent transaction. As a quick recap, on January 20, Tucows acquired eNom, a wholesale domain name registrar, from the Rightside Group for a purchase price of $83.5 million. The eNom business adds approximately 14.5 million domains under management, 28,000 resellers and approximately $15 million in EBITDA, which we hope to be able to expand to $20 million over the next 24 months as we realize the synergies available to us.

This transaction is overwhelmingly about generating scale and realizing cost efficiencies. Most of these will be realized simply through greater efficiency in the technical footprint and a much lower reliance on licensed software. We note that the eNom business is a flat, potentially even slightly negative growth business in terms of gross margin dollars. This is primarily due to the customer mix being composed of a higher number of traditional web hosting companies in North America and Europe, the 2 customer profiles that we've been calling out as more growth-challenged for the past couple of years. eNom also has historically lower renewal rates than the OpenSRS business.

Turning now to the key operating metrics for our Domain Services business for the fourth quarter, we once again saw the steady performance we've come to expect from this business quarter in and quarter out. In our wholesale channel, total registrations for the fourth quarter were up 19% year over year, with continued strong growth in OpenSRS transactions, supplemented by the addition of the Melbourne IT names acquired in April of 2016. The number of new transactions grew by 18% and renewals were up an equally healthy 19%. Our renewal rate continued in its historical range of within a point or so of the 75% mark, coming in at 76% in Q4, well above the industry average. Total domains under management expanded 12% from the end of Q4 last year to 14.9 million, with the bulk of that driven by the Melbourne IT acquisition. I will also highlight that in Q4, gross margin again increased, continuing an ongoing trend as we continue to benefit from the shift to mix in higher-margin products.

On the retail front, Hover delivered another strong performance, with gross margin up 13% from Q4 2015, driven by continued steady growth in the customer base, which was up 22% from the end of 2015. And I will note for you that our customer growth in Q4 benefited from a onetime pickup of about 13,000 customers from a deaccredited registrar. In addition, our renewal rate remained well above the industry average at 81%.

As part of the eNom acquisition, we acquired a mature retail business and associated customers, which for the past few years has been more about maintaining and servicing eNom existing customers as opposed to growth. It has not been actively promoted and, as a result, has a flat to declining trajectory. It's something we don't intend to change in the short term, but as we look under the hood and get a better sense of the platform, as we will with all of the operations, the long-term plan might be different.

Going forward, we're not going to be breaking the 2 retail businesses out separately. We'll report a single retail domain line as we always have, but we will provide a sense of how these individual businesses are doing relative to their current trajectories. On the people side, we've already recognized a few places where we will be able to use people and skills more broadly. We all know that the Domains business is a very low-margin business and one where you have to be extremely careful of your costs. Accordingly, we've always run the Domains business pretty lean. This gives us a singular opportunity to take advantage of the good people we've been able to pick up. We even see some opportunities in people across the Ting businesses.

Ting Mobile added over 4,000 accounts and 10,000 devices in Q3 to bring our total to 151,000 accounts and 245,000 devices. Taking a closer look at those numbers, it was another strong quarter of growth in devices per account, as more accounts moved beyond just one device. With service on multiple networks, support for just about every old and new device on the market, lower data rates and even a generous relief program for early termination fees, it is getting easier and easier for families to bring every member to Ting. The quarter also benefited from better-than-expected churn at just under 2.5%. Q4 is typically a time for increased switching throughout the category and has historically been the highest quarter for churn at Ting. That 2.5% is a welcome improvement over the 2.7% we reported in Q4 of 2015 and the 2.8% we reported last quarter. After defying seasonality for the last 2 quarters of the year, it seems that our data rate decrease in August has had an impact on churn. We impacted the top addressable reason why customers were leaving us and they responded almost immediately. We look forward to a full year with these new rates and increased retention efforts.

Folks who were paying particularly close attention might have noticed a slight decrease in mobile gross margin dollars from just over $9 million in Q3 to just under $9 million in Q4. I want to remind you that Q3 saw inflated margin, as we received cost breaks from the carriers in July and customers did not start seeing those price breaks until early September.

Now that the dust has settled from our decrease in COGS and price drop, I should update a key metric on the business. I've historically talked about Ting Mobile customers representing about $200 a year in billed gross margin, around a $35 bill at a 50% margin. And you'll remember that I took that gross margin number up last quarter. As total usage per account has increased and our costs have decreased, that total gross margin dollars per year per account is now around $240. Over time, we expect bills to continue to go up with increased usage and our profit margin to go down with thinner margins on high usage. But we will likely continue to land around that absolute margin dollar number.

I will also update on the infomercial that I mentioned last quarter. We ran a pilot in November with moderately encouraging results. The placements made the phone ring, which is a great start. We would like to improve the cost per call, but conversion is where we need to focus. We believe that there is enough potential to test further, but before we turn it back on, we've been doing quite a bit of work, particularly on the conversion side. We have listened to thousands of calls and built training documents, scripts and tools aimed at closing more deals. We've engaged an outside sales capability to help us optimize and scale quickly through the pilot phases. We have also identified resources from the recent eNom acquisition that bring greater phone sales experience and skills than anything we've ever had in-house. In the end, there are very few acquisition channels that have the scalability that television does. So we are determined to give it our best shot and we are hopeful that there is a path to an acceptable cost per acquisition. The next round of testing will take place later this month and I will update you on the next call. Of course, if you're up late and happen to see the infomercial running repeatedly, you will have some early indication.

We also continue to test a wide range of sponsorships, partnerships, distribution opportunities and direct response vehicles to broaden our awareness and expand our base. We continue to find small wins and are happy to provide detail when those small wins become bigger wins.

In November, Consumer Reports released its annual survey of U.S. cell phone providers, and Ting was once again the top-rated postpaid service, outranking major carriers and challenger brands alike. I will also share an opportunity that materialized just in the last few days.

Another Sprint MVNO called RingPlus has announced that it will be shutting down its service, and we've reached a tentative agreement to migrate their customers to Ting. It is simply a marketing agreement, not an acquisition of any assets or resources. They had roughly 80,000 customers, most of whom were on a free plan. We do not know how many real customers this will produce after an inevitable initial exodus but we know that it will initially inflate gross adds, churn and marketing expenses in the form of credits we're providing.

We wanted to share this, as it has been made public on their forum and on Reddit, and we wanted you to know that this is a good opportunity but it will take a lot of work, especially at the customer service level. And we really will have no indication of success until the next call. The data simply will not be right. So Ting Mobile enters 2017 with a strong brand, strong financials, strong customer retention and a ton of exciting new ideas and initiatives on customer acquisition and conversion. It also enters 2017 with a run rate of over $35 million in annual gross margin and over $70 million in revenue. We are confident that Ting Mobile still has its biggest growth opportunities ahead and we are excited to get at them.

Meanwhile, Ting Internet had another great quarter of progress on the ground, underground and up on poles. In Charlottesville, Virginia, our customer installs continue to increase every single month, and we continue to be limited only by city permits, serviceable addresses and install capacity. Meanwhile, we did add another couple thousand serviceable addresses in Q4, bringing us up to about 12,000 potential customers. It is also worth noting that while we started building the network and servicing customers in Charlottesville even before we instituted our preorder system, preorders now play a key role in guiding our network expansion there, just as we will see in a new town like Holly Springs. Also, preorder is proving to be about as good as an order, with over 90% conversions so far from one to the another.

In Westminster, Maryland, where the city is building the network, the city is nearly finished with its next wave of construction and we have just started lighting up the first customers in these new neighborhoods. Likewise, Centennial, Colorado and Sandpoint, Idaho are both hard at work on their municipal core fiber networks and we expect to be servicing the first customers in both markets later this year. We did light up the first customers in Holly Springs at the start of 2017 and we're moving quickly to convert all the preorders in the first few neighborhoods there into active customers.

I remain comfortable with the core assumptions and metrics that I've shared on the Ting Internet business. The variables we will most look at optimizing going forward will be billed costs and adoption rates. We do not expect to be changing those variables for your modeling quarterly. Much like gross margin per customer per year on Ting Mobile, we will more likely revisit them over the years. Again, we expect to see 20% adoption among serviceable addresses in a year and 50% in 5 years. At these take rates, we'll be paying about $2,500 to $3,000 per customer in CapEx and those customers will be worth about $1,000 a year in margin. Again, just these first 5 towns should represent about 85,000 serviceable addresses at completion. We certainly look forward to expanding our footprint further and we have more inbound interest than we have ever had before. I expect to announce additional towns this year but I have no imminent announcements at this time.

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

Thanks, Elliot. As Elliot discussed at the outset, the fourth quarter was marked by strong financial results, which contributed to record performance across each of our key financial metrics for the full year 2016. Revenue grew 9% to $48.8 million from $44.7 million for Q4 of last year, driven by the expansion of the Ting Mobile subscriber base, the incremental contribution of the Melbourne IT international wholesale domain reseller channel that we acquired in April 2016 and growth in the Hover customer base.

Cost of revenues before network costs increased 5% to $30.7 million from $29.2 million for Q4 of last year. This resulted in an increase in gross margin before network costs of 17% to $18.1 million from $15.5 million. As a percentage of revenue, gross margin before network costs expanded to 37% from 35%.

Looking at gross margin by line of business, gross margin for network access increased by $1.4 million or 18% to $9.2 million from $7.8 million for Q4 of last year, with the increase driven entirely by Ting Mobile. As a percentage of revenue, gross margin for network access increased to 49% from 46%. Gross margin for Domain Services for the fourth quarter increased $1.2 million or 16% to $8.9 million from $7.7 million for the corresponding period last year. As a percentage of revenue, gross margin for Domain Services expanded to 30% from 28%.

Looking at each of the components of Domain Services individually, gross margin for the wholesale channel increased by $900,000 or 17% to $6.2 million from $5.3 million, with the increase attributable to the incremental contribution from the acquisition of the international wholesale reseller channel for Melbourne IT and the continued benefit of the shift in sales mix to our higher-margin services. As a percentage of revenue, gross margin increased to 24% from 22%. Gross margin for retail services increased by $200,000 or 13% to $2.1 million from $1.8 million for the same quarter of last year. As a percentage of revenue, gross margin for retail services decreased slightly to 54% from 55%.

Gross margin for portfolio services was up 7% to $555,000 from $517,000 for Q4 of last year. As a percentage of revenue, gross margin increased to 80% from 74%.

Turning to costs, network expenses for the fourth quarter of 2016 were relatively flat at $1.3 million compared to the same period last year. Total operating expenses for the fourth quarter increased 20% to $11 million from $9.2 million for Q4 of last year. The increase is primarily due to the following incremental costs, mainly in support of our network access initiatives.

First, I will note that during the quarter, we incurred some onetime expenditures totaling approximately $1 million related to the eNom acquisition and the Ting Mobile business. In addition, I would note for you that we are still expecting to incur approximately $0.5 million of additional eNom transaction-related costs during the first quarter of 2017.

Second, marketing expenses increased by $500,000 year over year, primarily for the acquisition and ongoing support of Ting Mobile and Ting Internet customers. Credit card processing fees, primarily to support the growth of Ting Mobile and Ting Internet and contact in outside services, increased by $200,000. And finally, depreciation and amortization, which increased by $200,000, primarily the result of our acquisition of the BRI Group in February 2015 and the acquisition of the international reseller channel of Melbourne IT in April of this year.

These increases were partially offset by the impact of the fair value adjustment on matured contracts, which resulted in a $1,900 realized gain upon settlement of currency-forward contracts for the quarter compared to a realized loss of $100,000 for Q4 of last year. As a percentage of revenue, total operating expenses increased to 23% from 20% for Q4 of last year, largely the result of the impact of the onetime expenses I mentioned earlier.

Excluding the onetime expenses mentioned earlier, total operating expenses as a percentage of revenue were relatively unchanged when compared to the fourth quarter of last year at 20%. Net income for the fourth quarter was $2.8 million or $0.27 per share compared with $3.1 million or $0.29 per share for the same period last year. Again, for comparative purposes, net income for the fourth quarter of 2016 included the 2 onetime expenses totaling approximately $1 million that I mentioned a moment ago.

Turning to EBITDA, as a reminder, two quarters ago we modified the definition of adjusted EBITDA in response to clarification guidance regarding non-GAAP measures issued by the SEC in May of 2016. The SEC guidance indicated that adjusting earnings for deferred revenue may not be consistent with disclosure rules. Accordingly, we revised our definition of adjusted EBITDA to eliminate the adjustments for the effect of net deferred revenue to reflect net revenue on an earned basis. For those of you wishing to compute our adjusted EBITDA in our prior definitions, this can be done with reference to our disclosure financials and our MD&A. Adjusted EBITDA, using this new definition for the fourth quarter, increased 33% to $7.3 million from $5.5 million for the corresponding period last year.

Turning to the balance sheet, cash and cash equivalents at the end of the fourth quarter of 2016 were $15.1 million, up $4.6 million from $10.5 million at the end of the third quarter of 2016. The increase compared to the end of the third quarter was primarily the result of the generation of cash from operating activities of $8.9 million. This was partially offset by our continued investment of $4 million in property and equipment, primarily for the continued buildout of the Ting Internet footprint, and $258,000 for repayment of our credit facility. At the end of the fourth quarter, the outstanding amount in our credit facility was $10.2 million, down slightly from $10.5 million at the end of the third quarter and up from $3.5 million at the end of the fourth quarter of 2015. The increase compared to the fourth quarter of 2015 is largely the result of our using $6 million to fund the acquisition of the Melbourne IT wholesale domain reseller channel and our borrowing $2 million to fund the buildout of our Ting Internet footprint.

Subsequent to the end of the quarter, concurrent with our acquisition of eNom, we expanded our credit facility to $140 million from the previous $75 million level and drew an additional $84.5 million on that facility to fund the eNom purchase. Deferred revenue at the end of the fourth quarter of 2016 was $77.8 million, up 9% from $71.6 million at the end of the same quarter a year ago and down marginally from $78.4 million at the end of the third quarter of 2016. The increase relative to Q4 of 2015 primarily reflects the additional deferred revenue from the Melbourne IT wholesale domain acquisition.

I'll now turn the call back to Elliot. Elliot?

Thanks, Mike. First, a brief comment on our newest Board member, Brad Burnham. On January 12, we announced that Brad Burnham was joining our Board of Directors. Brad is a founding partner at Union Square Ventures and I'd been pursuing Brad to join our Board for a number of years. He finally relented. There is a post on the Union Square Ventures blog about his reasons for joining the Board and if you're interested, I suggest you read them.

In connection with him joining, Union Square Ventures purchased public stock of Tucows. And by that, I mean not from the Company. They have not filed in relation to that investment, nor are they required to. I'm excited to have Brad on the Board and his interest in the open Internet and the impact that fast, reliable Internet access can have on society makes him a great fit.

With speaking with many of you, the topic you most like to discuss is capital allocation. For us, the eNom acquisition represents the largest amount of capital we have ever deployed in one bite. I'd like to talk about that and our expectations for 2017.

First, 2017. Unfortunately, I need to reiterate some accounting that Mike just talked about, also something I talked about on the call following the transaction. But this deal will make the GAAP numbers for 2017 rather disconnected from the cash generated by the business. Under U.S. GAAP purchase accounting rules, we're required to record all assets and liabilities at fair value as of the date of acquisition, which in the case of deferred revenue will result in it being recorded at a different value than its historical book value. Most notably, this will have the effect of reducing revenue and deferred revenue of the acquired business from what would have otherwise been recognized pre-acquisition. Again, this accounting will have no cash impact.

The impact will be a roughly $8 million reduction in adjusted EBITDA in 2017. Without taking that noncash impact into account, we are providing adjusted EBITDA guidance for 2017 of $50 million. This is being delivered with continued solid growth expected in our Ting Mobile business, a bit of growth from our existing Domains business and the addition of eNom. I will also note that this is being delivered while investing between $4 million and $5 million in the Ting Internet business on an operating level. I should note that this number is up only slightly from the investment this year, which was higher than planned but not at all troubling.

There are a couple further caveats on that number. There are a lot of big moving parts right now: the eNom integration, the huge opportunity represented by the Ting Internet business and some very real customer acquisition initiatives in Ting Mobile, including the potential hit of credits around the RingPlus marketing transaction. We may choose to step up and spend in any of these areas. As always, we will keep you well apprised as we proceed.

In terms of the transaction itself, it has been 100% financed, as we've used our strong cash flows and clean balance sheet to access significant capital efficiently and inexpensively, without impacting our planned capital expenditures on fiber in any way.

The fourth quarter was a very solid finish to a very solid year, a year in which continued growth in revenue and the leverage in our business propelled us to new levels of profitability and maybe more importantly for the long term, a year in which we took some very important steps that will continue to drive growth and profitability for years to come. And each of our businesses contributed just what we would have hoped to the overall business strategy. Domain Services achieved greater scale and efficiency with the acquisition and successful integration of Melbourne IT's international wholesale domain reseller channel and the very recent acquisition of eNom, with its expected operating synergies to come over the next 24 months. Ting Mobile delivered outstanding growth, finishing the year with a run rate of over $35 million in annual gross margin and over $70 million in annual gross revenue. And Ting Internet took huge strides towards future contribution, as we added new towns, expanded our networks, drove demand and optimized our operations and processes.

And with that, I'd like to open the call to questions. Operator?

(Operator Instructions). Hubert Mak, Cormark.

Firstly, I just want to clarify some of the numbers that you threw out (inaudible) guidance. I heard $50 million is the combined run rate for 2017. And I guess the $8 million in EBITDA reduction is related to eNom to go from pro forma to --

I'm sorry, that would be that noncash deferred revenue catch up and then start to realize. That's right.

Okay and included in that is $4 million to $5 million in operating, I guess, investment for the fixed Internet?

That's correct.

Okay. And just related to that, are you guys able to provide what the potential amortization coming from the eNom?

Mike will correct me if I'm wrong, but it was a share purchase. So there was a little bit -- I don't know if you talked about it, but there was a little bit of an NOL benefit.

We can't talk about that yet.

Well, we can't talk about that yet, so none of you heard that. That's probably going to have to wait, Hubert, for the final audit.

Okay. I understand. And just on the mobile. I heard that you [talked with] the RingPlus, which you're gaining a substantial base here and I think a lot of them were free, as you mentioned on the call. So what is your strategy here in moving some of these to potentially paying? And how do I think about that in terms of like what -- any idea what (multiple speakers) conversion?

So it's very difficult to tell what the end numbers will be like. There were certainly -- of that 80,000 customers, the significant majority, most of those customers took advantage of the free offering. There were still a solid number of customers well into the 5 figures who were paying something every month. Now it's a little bit more of a pay-as-you-go service and the plans were all over the place. So we're looking at the usage.

But I would say two things. First, this allows us to leverage some of the things we do very well. So particularly there, our ability to provide a quick solution to both RingPlus and Sprint in terms of platform, our ability to get the website where it'll need to be to receive these people comfortably, our ability to deal with challenges on the communication and social side, so sort of all of that customer experience stuff that we do so well. In addition, this will really, really put a lot of work on customer service. So we're going to be sorting through these customers. I think I'm comfortable saying I'm -- it's very difficult to say what we will expect, but if we get at the end of the day, you know it's a year from now, there's an extra 5,000, 6,000, 7,000 regular Ting customers, we'll be quite happy with the approach.

Okay.

So you heard that as a hope, not a guidance.

Right. I understand. In terms of the infomercial, it sounds like that is a key driver here or at least key initiatives you guys are focused on here. And based on your commentary, you suggested that you're seeing moderate sort of impact here. Like, is this the key initiative? Is there anything else that you guys are working on that could potentially reaccelerate the growth in terms of sub adds or at least the net adds? And how do I think about that (multiple speakers)?

Well, first -- the first thing I'd say is, it's the first tick up in a number of quarters. So I want to look at that positive and see it as that. Second, there's a couple of reasons why I wanted to call out the infomercial in particular. First of all, it is -- it's kind of uniquely expensive. With a lot of things in this world, you can test them very rigorously at $5,000, $10,000, $15,000 or $20,000. The infomercial required a bit of a step-up. I've talked about the spend there as being in the mid 6 figures to really fully test it. So I wanted to call it out for spend purposes.

And second, it's something that people can see. It's visual. I would not want a shareholder of ours to have had trouble sleeping one night and the first they heard about the infomercial was having it pop up at 2 in the morning as they're watching TV. So I wanted to share all of it with you.

It also is uniquely scalable. I mentioned in the prepared remarks, television, uniquely, you're able to turn the dial, and as you've heard me lament about our customer acquisition processes for years, the CAC has always been fantastic, but it wasn't inherently scalable. So I think that for all of those reasons, I've been calling out the infomercial particularly. But there are a number of other things we are playing around with. And Hubert, it could be a series of small wins. So we'll see. But we feel good.

Okay, great. And then on the fixed Internet side, are there any new markets you guys are entering? Like, is there some sort of a thought of how many markets you might be -- new markets you're entering this year? And also what is the CapEx expected here for this year?

You know what? Thank you. I thought about -- as you can appreciate, Hubert, this -- first of all, this call, just the prepared remarks were longer than they typically are by about a third. And I was cutting and hoping some of this stuff would come up on the questions. There, I think you'll expect to see CapEx in the $30 million, $35 million range. As you saw last year, we'll be updating that on a regular basis, so that you can -- we'll be sharing it with you as we go along. Because this is construction, things happen. We think we're going to be a little bit better predicting this year than last year, but let's see, because this still is a relatively new business for us.

And in terms of number of markets, I think that we're very, very focused on the markets we've announced right now. As I said on the call, there's nothing imminent, but I think you'll still see a couple, few markets this year, and the exact number will really depend on two things: one, watching some cities come out of the other end of their process; and two, how well we do with running multiple builds and multiple install teams and multiple marketing efforts across markets, as we're now taking on for the first time. (multiple speakers) scale up a bit there.

Okay. So related to that then, your capacity in terms of -- on a fixed Internet, you're looking at currently 5 -- sorry, I forgot how many markets exactly. Like, whatever current markets you have, like, is your capacity at sort of 100% in terms of how you can roll out number of cities, or --?

What would I say? I think every quarter, two things happen: we're at capacity, and we expand capacity. This is a business that's going to be ramping up really for the next couple, few years. So there's really -- there's almost not a day in this business where we're not at capacity and that we're not working on expanding capacity at the same time. If I took anything as points on a line, whether it was people working on that business in head office, whether it was number of crews doing installs, number of crews doing construction, all of those numbers would be up and to the right.

Okay. And then I just want to clarify, in terms of the CapEx, can you just repeat what that number was for -- either annually or quarterly? What was that number you --

Yes, sure. That was -- in 2017, I think we'll see something in the $30 million, $35 million range.

Okay. So that's up quite significantly here from 2016 then, right? I guess that's really in terms of construction then, right?

Sorry, Hubert, can you repeat that?

So is the $30 million, $35 million CapEx spending for the fixed Internet?

That's right.

Yes, so that's a lot -- pretty big increase from last year, right? Or from 2016?

Yes, I think you're going to see -- I think part of that, Hubert, is that some of the Holly Springs construction, which we thought through a little bit of a rosy lens might have been in Q3 and Q4 last year, is actually going to be in Q1 and Q2 this year. So you could see like a chunk swing like that, too.

Okay, I understand. I just wanted to clarify that. Okay. Thanks a lot. I'll pass the line.

Patrick Retzer, Retzer Capital Management.

I wanted to clarify the eNom acquisition. My numbers are you paid $83.5 million for the business and it's got annualized revenue of about $155 million. Is that right?

I think that's about right. We're looking at three quarters -- so it's like do I go backwards, do I go forwards? The three quarters -- I've got three quarters on it. But that's not far. That's about right.

Okay. And then for the first full year you expect $15 million in EBITDA from that business and after all the synergies are achieved, $20 million a year in EBITDA?

Yes, I probably should call that cash contribution because I'm not allocating with that. But yes.

Okay. So you paid about --

(multiple speakers) by those amounts.

Okay. So you paid about 4.2, 4.3 times ultimate cash contribution?

Yes, I kind of -- yes, so you heard me on the last call -- I don't know if you were on it, but on the call right after the announcement. I kind of look at -- I like to look at very simply the sub-90, delivering about 20, that kind of thing.

Okay. And by virtue of that transaction, you're now the second-largest domain name registrar in the world?

That's right. Well, it was always a little bit of back and forth around those positions, but now it's very comfortably us in #2 behind GoDaddy, with a pretty large gap back to #3.

Okay. And then either on Twitter or on your website, you posted a video of a new-to-the-US technology of blowing fiber, which is faster, more efficient and disturbs the surface of the property less?

Yes, that's right. It's something that our guys picked up on some of their travels in Asia and we worked with our contractor in Holly Springs to practice with that. And the thing that probably was most positive to come out of that is that really when we were on your street, getting your street ready for fiber, you noticed much less than would have historically or traditionally been the case. So we had a very good response from the people of Holly Springs just in terms of not upsetting them too much, which often when people are laying conduit, laying infrastructure, there tend to be a lot of issues. Here there's not very much gap between we're doing the construction work and we'd love to have you as a customer. So we think that's pretty positive. And we were pretty aggressive on social as well in dealing with anybody who did have a question or an issue.

Okay. But that doesn't lead you to reduce your cost per install or per subscriber?

No, it does. No, it absolutely does. Again, that's a play -- it's a variable we're very focused on. You won't see me moving my numbers that I provide on a regular basis for some period of time, because I don't want to be doing that every quarter. But that absolutely impacts. What used to take a number of human beings laying fiber in an open trench or ditch is now done by machine in seconds. So there absolutely is a real cost savings to it.

Okay, great. And then with regard to new markets in 2017, I know the previous caller and you discussed this. But I didn't -- I mean, do you have an estimate of either serviceable addresses or number of markets you'll announce in 2017?

I don't, because there is a real variability for it. Last year was the first year we were announcing multiple markets and I found that I don't know that it helped. So I think what you can look at -- you can take the CapEx spend, you can divide it by the cost per build that we put out, which is -- think about that in the $1,250, $1,500 range, and you can get to the number of serviceable addresses we're projecting. Then you can look at the markets that we're in and you can kind of lay them out on the map and you can fill in however many additional cities you want for the rest of the addresses. But you'll see that we've got lots of meat on the bone, that $30 million, $35 million. We're not quite finishing the places we are. Right?

Right. So in terms of the markets, are they showing more or the same amount of interest in fiber or less interest? How would you characterize that?

Well, I think the interest remains consistently strong. I do think that a lot of municipal processes are kind of waiting a little bit to see what happens with some of the infrastructure program or infrastructure tax plan. There's a lot of regulatory uncertainty right now. For some, that's causing them to maybe try and accelerate. For others, maybe they're sitting back a little more, but the native interest is just as strong as it's ever been and continues to get stronger as people's need for fast, reliable Internet over fiber increases.

Okay. So you won't be want for lack of opportunity anytime soon?

Oh, no. No, that's not a variable I'm worried about.

Okay, well keep up the good work, guys. Thanks.

(Operator Instructions). Jeff Osher, Harvest Capital.

Thanks for taking my questions. Just on the -- as we look at the $8 million of purchase accounting EBITDA that kind of goes into that black hole, was that included in the $50 million? In other words, is it going to be $42 million for GAAP purposes, $50 million adjusted?

Yes, it's $42 million for GAAP purposes. They just changed that approach, as Mike has talked about endlessly, last year around deferred revenue. So look, that treatment in our business in particular, where there's no right of refund on the domain name, is a little bit harsh. But that treatment with an acquisition, combined with purchase accounting rules, is especially harsh. So I'd just like to (multiple speakers).

No, no. I agree. I just wanted to make sure -- I wasn't sure if the $8 million was included in the $50. So $42 for GAAP --

Yes, no, no, no. I like the clarification but I was more going to explain why I even kind of give you both numbers. We always do run the business for cash. And so I always like you guys to be following in the same way we're playing.

No, makes a lot of sense. And then the $30 million to $35 million, that's CapEx. So when we reconcile -- if we think about the $30.6 million of organic EBITDA in 2016, where you grew -- contribution EBITDA annually was up about $10 million plus, the implied contribution is less than $5 million in nominal dollars in 2017, organic contribution, right, if we exclude the $15 million, give or take, of eNom cash expected contribution. Is any of that explanation due to the $30 million to $35 million of CapEx also being -- is there an OpEx load in that $30 million to $35 million or is that true capital expense and apples and oranges?

No. That's CapEx. And really, I'd just call out two things. I'd call out that we do have a little bit greater investment in the Internet business this year. And $50 million is such a round number. $51 million implies a precision that nobody in my seat should have.

Elliot, the $4 million, what may be helpful, of investments in fixed Internet that you kind of outlined for 2017, what would be the equivalent for 2016?

That was, I want to say, high -- mid-3s, high 3s. But in 2016 -- so that number does include some of the peripheral businesses that we picked up in the BRI acquisition a few years back in Charlottesville. And some of those businesses we've really been paying a little bit less attention to. So some of that investment, more so than will be the case in 2017, comes from a bit of a decline in those businesses.

Got it. Got it. And so two more just quick ones. So it sounds like when we think about free cash for 2017, it may be a bit of an anomaly where free cash is -- when we factor in the incremental interest expense from the line in tax effect, pretax, free cash flow, it'll be down materially in 2017. But premised on the investments you're making, obviously, there's a pretty defined return on the CapEx you've delineated previously. But we should think about free cash being in the single digits in 2017?

Well -- so I'd say two things. One, I assume you're talking about free cash post CapEx.

Yes, maybe my -- yes, that's right.

And so the second -- what's very important here is there is a real wild card around what tax is going to be like. So that's both in terms of our tax planning and what the tax treatment of infrastructure is going to be like. So I'm not even thinking about that number until I see kind of what comes out of the other end of some of the [tax discussions that are going on].

That's fair, that's fair. But if we apply a 37% tax rate, give or take, then -- and again, I think you've explained why, given the expected returns. Last one for me -- the $1 million of eNom onetime expense, was that G&A? A full -- all of it?

(inaudible)

So that was a cash expense and then the accrued liability jump, I assume that's just merit increases and bonuses and things like that?

No --

The balance sheet --

That's all in the $1 million, with the --

No, no, no. I'm sorry, the accrued liability on the balance sheet was up $1.2 million. It was up $2.6 million sequentially.

Yes, that is a bucket of things. Certainly, in the earlier parts of the year, you start building accruals rather than winding down towards the end of the year.

No, but I'm talking about sequentially it was up $2.6 million. So that wouldn't have factored in accruals that were expensed earlier in the year.

We want to take a look at it, Jeff.

Okay, okay. Good enough. We can follow up offline. Thank you guys for taking my questions and nice work.

Hubert Mak, Cormark.

I just wanted to clarify, in terms of the fixed Internet, are we still looking for breakeven here operationally for 2018? I think that was the initial target that you guys had.

That's right. Well, what I said more specifically was towards the end of 2018, so not necessarily in 2018. And that was -- if you remember, Hubert, that was the way I kind of flagged it for the Ting Mobile business as well. What I'm looking at there is less about what is the calendar year result and more what is -- when does it move from costing money to generating money?

Right. So you're looking for an exit where you -- 2018 where you're going to break even and then start contributing positively on the EBITDA line in Q1 2019, I guess. That's the thinking, right?

It might be. So again, I'm going to be -- late 2018 is kind of what I'm thinking, but I'm not going to be precise between late 2018 and early 2019.

Sure. No, understand. Okay.

And as you know, as we get more visibility and get closer to it, we'll keep honing you in on it.

Shai Dardashti, The Manual of Ideas.

Thank you for taking my questions. I'd like to circle back on RingPlus, if I could, just to identify if I'm understanding the facts correctly. I believe that RingPlus is having current clients automatically migrate to Ting, to sign up unless they opt out. Is that correct or am misunderstanding the process?

It's close. So I think there's three comments I want to make there. First, this impending closure, Sprint shutting them down, I want to say came out Friday. Michael, is that right?

Friday. Yes.

Friday, yes. So that came out Friday. So customers knew about this. We started kind of mobilizing Saturday. But between Friday and the time we eventually do migrate that base, there's people who are finding new suppliers. We certainly have had a number of ports in that are waiting approval. So that's going on. So whatever -- from the 80,000 there's going to be some number that are going to move before we do anything. So that's kind of the first point.

The second point is then that base will all kind of come over to us. So yes, that's correct, mitigated by the first point.

And now the third point is, but only the people who agree to our terms of service, give us a valid credit card and sign up for a Ting account. As you know, that means really picking a user name and a password and providing the address around the credit card, right? Only people who take those positive steps will come over. Does that make sense?

And I guess what I'm trying to understand is if there's conservatism or if there's something I'm missing. 5,000, 8,000 converts out of a large base seems like a very low number percentage-wise.

No, but remember, Shai, the vast majority of those customers are taking advantage of their free service. So those are people for whom Ting was too -- many of whom, Ting was too expensive at $23 a device. And when I say too expensive, I don't mean couldn't afford as much as didn't want to pay, right? So there's certainly some quality in there but the vast majority of those customers were on the free service, not paying anything any month.

And then switching gears to Virginia, I notice that Ting Internet has made a statement alongside Google and Netflix. I'm wondering what impact there might or might not be with Charlottesville in terms of regulatory dynamics.

It's tough to -- I don't -- Charlottesville in particular, I don't think there's going to be any impact on the ground -- in the city in terms of our relationship with the municipal government. I will also tell you that I believe -- at least what I was seeing trending was that some of those issues in Virginia were going to be fairly effectively dealt with. So I think there might be a good news outcome in some of those efforts as well. Specifically, we were -- I should note, because I know this is inside baseball for a lot of people, we joined with others in objecting to legislation which would have limited cities and towns in the State of Virginia from trying to take steps to be more involved in their cities getting fiber.

That was our last question. At this time, I will turn the call back over to the presenters.

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

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