Canada’s Tucows bets on fed-up U.S. mobile users

Domain seller also building fibre networks

After a decade-long hibernation following the dot-com crash, Canada’s

is roaring back to life with an acquisition and a deepening effort to win over disgruntled U.S. mobile phone customers.

The Toronto-based Internet services provider is the largest re-seller and manager of domain names after Scottsdale, Ariz.-based GoDaddy Inc. Its customers are firms like Squarespace Inc. and Shopify Inc., which help customers get set up with websites but don’t want to manage registering and renewing the addresses themselves.

Tucows’ shares are up 34 per cent on the Nasdaq composite this year after the company agreed in January to acquire longtime rival eNom from Rightside Group Ltd. for US$83.5 million, consolidating its place as the main wholesaler of Internet domains. That turbocharged a turnaround which has seen its shares advance more than 12-fold since 2012, eclipsing the doubling of the Nasdaq and rewarding investors such as East Setauket, N.Y.-based Renaissance Technologies LLC, one of the of the world’s most profitable hedge funds.

The stock was little changed at US$47.35 in New York on Tuesday for a market value of US$497 million.

Business is booming as ICANN, the non-profit gatekeeper of web addresses, opens up hundreds of new domain names, giving individuals and companies the chance to have a web address that ends in something more creative than “.com” or “.org,” like “.beer” or “.Republican.”

Still, it’s a tough niche to be in.

“It is a hyper-competitive market with extremely thin margins but we were early and we have had scale since nearly the beginning,” chief executive Elliot Noss said in an interview at the company’s Toronto offices on March 2. When someone buys a web domain for US$15, most of it goes to regulators and registries. Tucows gets US$1.20 to US$1.40 per transaction, Noss said.

So the company is plowing the cash from domains into higher-growth, highermargin businesses. In 2012 it started Ting Wireless, a cell-service provider that rents space on T-Mobile US Inc. and Sprint Corp.’s networks, and re-sells it to consumers with its own customer service and billing practices. Ting now has around 250,000 devices on its network, and the business accounted for more than a third of the company’s revenue in the fourth quarter of 2016.

The next frontier is Internet service. Ting is building out high-speed fibre networks in five mid-sized U.S. cities and plans to invest between US$30 million and US$35 million in the business in 2017. That number will grow in the coming years, Noss said. He’s going after U.S. consumers dissatisfied by the Internet service provided by cable TV companies, which sometimes have near-monopolies over certain regions.

“We have two businesses that generate a lot of capital, we’re happy to deploy it there,” Noss said. Tucows hasn’t started laying fibre in Canada yet, where cable and Internet providers like Shaw Communications Inc. and BCE Inc. are spending billions on their own fibre build-outs. Noss doesn’t rule it out though.

“We work with cities that want to work with us. If a Canadian city puts up its hand, we would love to work with them,” he said.

Though the eNom acquisition got investors interested in the domain business again, the mobile-phone division is where real growth is going to come from, Hubert Mak, a Toronto-based analyst with Cormark Securities Inc. said in a note to clients last month. He has the equivalent of a hold on the stock and a US$50 price target. The two other analysts who follow Tucows also have a hold rating.

“The mobile unit remains key to current growth given that it now accounts for around half of the company’s profitability,” Mak said. The stock is fairly priced at its current level, and wireless would have to grow faster for it to go much higher, he said.

Tucows expanded its credit revolver from US$75 million to US$140 million to fund the eNom acquisition. Still, the company’s leverage ratio is low and Noss said he’s open to pushing it as high as three times net-debt to EBITDA if the right acquisition target came along.

“We have a lot of power in our balance sheet,” he said. “We would look at anything in our spaces at the right price.” Tucows’ shares are up 34 per cent on the Nasdaq this year after the firm acquired longtime rival eNom.