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Tucows Reports Continuing Strong Financial Results for Second Quarter 2018

TORONTO, Aug. 08, 2018 (GLOBE NEWSWIRE) -- Tucows Inc. (NASDAQ:TCX, TSX:TC), a provider of network access, domain names and other Internet services, today reported its financial results for the second quarter ended June 30, 2018. All figures are in U.S. dollars.

Summary Financial Results
(In Thousands of US Dollars, Except Per Share Data)

  3 Months Ended June 30 6 Months Ended June 30
2018
(Unaudited)
2017
(Unaudited)
% Change 2018
(Unaudited)
2017
(Unaudited)
% Change
Net revenue 81,087 84,223 -4 % 176,882 153,791 15 %
Net income 3,608 5,242 -31 % 7,352 7,686 -4 %
Basic Net earnings per common share 0.34 0.50 -32 % 0.69 0.73 -5 %
Adjusted EBITDA1 11,188 10,374 8 % 21,567 16,711 29 %
Net cash provided by operating activities 5,754 8,131 -29 % 15,327 10,534 46 %
  1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.

Summary of Revenues and Gross Margin
(In Thousands of US Dollars)

  Revenue Gross Margin
  3 Months ended
June 30 
3 Months ended
June 30
  2018
(Unaudited)
2017
(Unaudited)
2018
(Unaudited)
2017
(Unaudited)
Network Access Services:
Mobile Services 22,411 20,379 10,433   9,677  
Other Services 1,895 1,248 605   302  
Total Network Access Services 24,306 21,627 11,038   9,979  
         
Domain Services:
Wholesale        
Domain Services 42,540 48,550 6,696   6,101  
Value Added Services 4,601 5,415 3,853   4,800  
Total Wholesale 47,141 53,965 10,549   10,901  
         
Retail 8,477 7,663 4,031   3,115  
Portfolio 1,163 968 968   783  
Total Domain Services 56,781 62,596 15,548   14,799  
         
Network Expenses:
Network, other costs - - (2,701 ) (2,261 )
Network, depreciation and amortization costs - - (1,727 ) (1,169 )
Total Network expenses - - (4,428 ) (3,430 )
         
Total revenue/gross margin 81,087 84,223 22,158   21,348  
             

/EIN News/ -- “The second quarter once again saw solid performances from each of our businesses,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “The domains business delivered consistent results outside of the expected in quarter impact of the transfer of 2.65 million very low margin names in the first quarter of this year. Ting Mobile delivered increases in year-over-year revenue and margin as we work towards the next phase of customer growth.  Finally, Ting Internet continued its steady progress from network builds and expansions across the footprint to serviceable addresses, to subscriber activations, to dependable recurring monthly revenue.”

Financial Results

Net revenue for the second quarter of 2018 was $81.1 million compared to $84.2 million for the second quarter of 2017, with the decrease due primarily to the bulk transfer of 2.65 million very low margin domain names during the first quarter of 2018, which was partially offset by the continued growth of Ting Mobile.

Net income for the second quarter of 2018 was $3.6 million, or $0.34 per share, down from $5.2 million, or $0.50 per share, for the second quarter of 2017.  Net income for the second quarter of 2018 includes acquisition and transaction costs of $0.8 million related to geographic headcount and operational alignments.

Adjusted EBITDA1 for the second quarter of 2018 increased 8% to $11.2 million from $10.4 million for the second quarter of 2017. 

Cash and cash equivalents at the end of the second quarter of 2018 was $11.2 million compared with $16.6 million at the end of the first quarter of 2018 and $15.1 million at the end of the second quarter of 2017.

Notes:

1. Adjusted EBITDA

Tucows reports all financial information required in accordance with United States generally accepted accounting principles (GAAP). Along with this information, to assist financial statement users in an assessment of our historical performance, the Company typically discloses and discusses a non-GAAP financial measure, adjusted EBITDA, in press releases and on investor conference calls and related events that exclude certain non-cash and other charges as the Company believes that the non-GAAP information enhances investors' overall understanding of our financial performance.

The Company believes that the provision of this supplemental non-GAAP measure allows investors to evaluate the operational and financial performance of the Company’s core business using similar evaluation measures to those used by management. The Company uses adjusted EBITDA to measure its performance and prepare its budgets.  Since adjusted EBITDA is a non-GAAP financial performance measure, the Company’s calculation of adjusted EBITDA may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. Because adjusted EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a liquidity measure. Non-GAAP financial measures do not reflect a comprehensive system of accounting and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies and/or analysts and may differ from period to period. The Company endeavors to compensate for these limitations by providing the relevant disclosure of the items excluded in the calculation of adjusted EBITDA to net income based on U.S. GAAP, which should be considered when evaluating the Company's results.  Tucows strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure.

The Company’s adjusted EBITDA definition excludes depreciation, amortization of intangible assets, income tax provision, interest expense, interest income, stock-based compensation, asset impairment, gains and losses from unrealized foreign currency transactions and infrequently occurring items, including acquisition and transitions costs. Gains and losses from unrealized foreign currency transactions removes the unrealized effect of the change in the mark-to-market values on outstanding unhedged foreign currency contracts, as well as the unrealized effect from the translation of monetary accounts denominated in non-U.S. dollars to U.S. dollars.

The following table reconciles net income to adjusted EBITDA (dollars in thousands):

  3 months ended June 30 6 months ended June 30
  2018
(unaudited)
2017
(unaudited)
2018
(unaudited)
2017
(unaudited)
Net income for the period 3,608 5,242   7,352 7,686  
Depreciation of property and equipment 1,330 879   2,562 1,636  
Amortization of intangible assets 2,326 2,063   4,657 3,825  
Interest expense, net 951 970   1,847 1,838  
Provision for income taxes 1,228 1,083   2,411 958  
Stock-based compensation 615 313   1,193 631  
Unrealized loss (gain) on change in fair value of forward contracts 46 (20 ) 43 (38 )
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities 282 (283 ) 459 (334 )
Acquisition and transition costs* 802 127   1,043 509  
         
Adjusted EBITDA 11,188 10,374   21,567 16,711  
*Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, related to our acquisition of Enom in January 2017.  Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.
 

Conference Call
Beginning this quarter, Tucows is evolving the format of its quarterly conference calls.  Concurrent with the dissemination of this news release, management’s pre-recorded remarks discussing the quarter and outlook for the Company have been posted to the Company’s web site at http://www.tucows.com/investors/financials.  In lieu of the usual question and answer period on past calls, for the next seven days (until Wednesday, August 15), shareholders and analysts can submit questions to Tucows’ management at ir@tucows.com. Management will post responses to questions of general interest to the Company’s web site at http://www.tucows.com/investors/financials/ on Wednesday, August 22 at 9:00 a.m. ET.  Questions that are more specific will be responded to directly. All questions will receive a response.

About Tucows
Tucows is a provider of network access, domain names and other Internet services. Ting (https://ting.com) delivers mobile phone service and fixed Internet access with outstanding customer support. OpenSRS (http://opensrs.com) and Enom (http://www.enom.com) manage a combined 24 million domain names and millions of value-added services through a global reseller network of over 38,000 web hosts and ISPs. Hover (http://hover.com) makes it easy for individuals and small businesses to manage their domain names and email addresses. More information can be found on Tucows’ corporate website (http://tucows.com).

 
Tucows  Inc.
Consolidated Balance Sheets
(Dollar amounts in thousands of U.S. dollars)
         
    June 30,   December 31,
    2018   2017
    (unaudited)   (unaudited)
         
Assets        
         
Current assets:        
Cash and cash equivalents   $ 11,161     $ 18,049
Accounts receivable     12,214       12,376
Inventory     3,248       2,944
Prepaid expenses and deposits     15,428       14,186
Prepaid domain name registry and ancillary services fees, current portion     94,754       103,302
Income taxes recoverable     3,137       3,004
Total current assets     139,942       153,861
         
Prepaid domain name registry and ancillary services fees, long-term portion     20,701       23,701
Property and equipment     34,538       24,620
Contract costs     1,354       -
Intangible assets     53,693       58,414
Goodwill     90,054       90,054
Total assets   $ 340,282     $ 350,650
         
         
Liabilities and Stockholders' Equity        
         
Current liabilities:        
Accounts payable   $ 7,340     $ 7,026
Accrued liabilities     6,770       6,412
Customer deposits     12,934       15,255
Derivative instrument liability     337       -
Deferred rent, current portion     21       21
Loan payable, current portion     17,721       18,290
Deferred revenue, current portion     122,976       129,155
Accreditation fees payable, current portion     1,099       1,175
Income taxes payable     1,477       1,226
Total current liabilities     170,675       178,560
         
Derivative instrument liability, long-term portion (note 5)     27       -
Deferred revenue, long-term portion     29,075       31,427
Accreditation fees payable, long-term portion     269       289
Deferred rent, long-term portion     126       130
Loan payable, long-term portion     51,012       58,634
Deferred Gain     258       429
Deferred tax liability     19,577       19,834
         
Redeemable non-controlling interest     -       1,136
         
Stockholders' equity:        
Preferred stock - no par value, 1,250,000 shares authorized; none issued and outstanding     -       -
Common stock - no par value, 250,000,000 shares authorized; 10,603,366 shares issued and outstanding as of June 30, 2018 and 10,583,879 shares issued and outstanding as of December 31, 2017     15,548       15,368
Additional paid-in capital     2,931       2,167
Retained earnings     51,027       42,676
Accumulated other comprehensive income     (243 )     -
Total stockholders' equity     69,263       60,211
Total liabilities and stockholders' equity   $ 340,282     $ 350,650
         


 
Tucows  Inc.
Consolidated Statements of Operations
(Dollar amounts in thousands of U.S. dollars)
                 
    Three months ended June 30,
  Six months ended June 30,
    2018   2017   2018   2017
    (unaudited)   (unaudited)
                 
Net revenues $ 81,087   $ 84,223   $ 176,882   $ 153,791  
                 
Cost of revenues:                
Cost of revenues   54,501     59,445     123,473     108,756  
Network expenses (*)   2,701     2,261     5,275     4,604  
Depreciation of property and equipment   1,228     714     2,359     1,305  
Amortization of intangible assets   499     455     998     836  
Total cost of revenues   58,929     62,875     132,105     115,501  
                 
Gross profit   22,158     21,348     44,777     38,290  
                 
Expenses:                
Sales and marketing (*)   7,852     7,447     16,217     14,667  
Technical operations and development (*)   2,355     1,798     4,450     3,492  
General and administrative (*)   4,256     3,285     8,786     6,742  
Depreciation of property and equipment   102     165     203     331  
Loss on disposition of property and equipment   -     2     -     2  
Amortization of intangible assets   1,827     1,608     3,659     2,989  
Loss (gain) on currency forward contracts   52     (27 )   49     (61 )
Total expenses   16,444     14,278     33,364     28,162  
                 
Income from operations   5,714     7,070     11,413     10,128  
                 
Other income (expenses):                
Interest expense, net   (951 )   (970 )   (1,847 )   (1,838 )
Other income, net   73     225     197     354  
Total other income (expenses)   (878 )   (745 )   (1,650 )   (1,484 )
                 
Income before provision for income taxes   4,836     6,325     9,763     8,644  
                 
Provision for income taxes   1,228     1,083     2,411     958  
Net income before redeemable non-controlling interest   3,608     5,242     7,352     7,686  
                 
Redeemable non-controlling interest   -     (117 )   (26 )   (243 )
                 
Net income attributable to redeemable non-controlling interest   -     117     26     243  
Net income for the period   3,608     5,242     7,352     7,686  
                 
Other comprehensive income, net of tax                
Unrealized income (loss) on hedging activities   (273 )   143     (256 )   329  
Net amount reclassified to earnings   13     (17 )   13     (98 )
Other comprehensive income (loss) net of tax of $84 and and $71 for the three months ended June 30, 2018 and  June 30, 2017, $78 and $131 for the six months ended June 30, 2018 and  June 30, 2017   (260 )   126     (243 )   231  
                 
Comprehensive income, net of tax for the period $ 3,348   $ 5,368   $ 7,109   $ 7,917  
                 
Basic earnings per common share $ 0.34   $ 0.50   $ 0.69   $ 0.73  
                 
Shares used in computing basic earnings per common share   10,597,228     10,528,219     10,592,994     10,501,407  
                 
Diluted earnings per common share $ 0.33   $ 0.49   $ 0.68   $ 0.71  
                 
Shares used in computing diluted earnings per common share   10,803,007     10,793,031     10,797,017     10,785,685  
                 
                 
                 
(*) Stock-based compensation has been included in expenses as follows:                
Network expenses $ 28   $ 3   $ 84   $ 8  
Sales and marketing $ 245   $ 61   $ 431   $ 120  
Technical operations and development $ 174   $ 58   $ 351   $ 119  
General and administrative $ 168   $ 191   $ 327   $ 384  
                 


 
Tucows  Inc.
Consolidated Statements of Cash Flows
(Dollar amounts in thousands of U.S. dollars)
                 
     Three months ended June 30,     Six months ended June 30, 
    2018   2017   2018   2017
Cash provided by:   (unaudited)   (unaudited)
Operating activities:                
Net income for the period $ 3,608   $ 5,242   $ 7,352   $ 7,686  
Items not involving cash:                
Depreciation of property and equipment   1,330     879     2,562     1,636  
Loss on write off of property and equipment   -     9     -     9  
Amortization of debt discount and issuance costs   69     80     139     147  
Amortization of intangible assets   2,326     2,064     4,657     3,825  
Change in capitalized contract costs   25     -     50     -  
Deferred income taxes (recovery)   (445 )   (2,885 )   (492 )   (1,565 )
Excess tax benefits on share-based compensation expense   (197 )   (1,182 )   (341 )   (2,171 )
Amortization of deferred rent   (4 )   1     (4 )   5  
Loss on disposal of domain names   28     7     65     18  
Other income   (42 )   (128 )   (171 )   (257 )
Loss (gain) on change in the fair value of forward contracts   46     (163 )   43     (301 )
Stock-based compensation   615     313     1,193     631  
Change in non-cash operating working capital:                
Accounts receivable   471     (905 )   162     (864 )
Inventory   (350 )   (1,267 )   (304 )   (1,096 )
Prepaid expenses and deposits   (717 )   1,186     (1,242 )   (2,371 )
Prepaid domain name registry and ancillary services fees   204     2,976     11,548     (2,513 )
Income taxes recoverable   165     2,513     430     (147 )
Accounts payable   (1,862 )   (592 )   270     (4,038 )
Accrued liabilities   (401 )   (1,818 )   358     13  
Customer deposits   (46 )   3,152     (2,321 )   3,068  
Deferred revenue   1,067     (1,273 )   (8,531 )   8,968  
Accreditation fees payable   (136 )   (78 )   (96 )   (149 )
Net cash provided by operating activities   5,754     8,131     15,327     10,534  
                 
Financing activities:                
Proceeds received on exercise of stock options   32     85     39     105  
Payment of tax obligations resulting from net exercise of stock options   (141 )   (609 )   (288 )   (1,322 )
Proceeds received on loan payable   2,500     -     2,500     86,998  
Repayment of loan payable   (6,253 )   (4,572 )   (10,825 )   (10,830 )
Payment of loan payable costs   -     (13 )   (4 )   (604 )
Net cash (used in) provided by financing activities   (3,862 )   (5,109 )   (8,578 )   74,347  
                 
Investing activities:                
Additions to property and equipment   (7,319 )   (2,909 )   (12,436 )   (6,602 )
Acquisition of a portion of the minority interest in Ting Virginia, LLC   -     -     (1,200 )   (2,000 )
Acquisition of Enom Incorporated, net of cash   -     -     -     (76,238 )
Acquisition of intangible assets   -     -     (1 )   -  
Net cash used in investing activities   (7,319 )   (2,909 )   (13,637 )   (84,840 )
                 
Decrease in cash and cash equivalents   (5,427 )   113     (6,888 )   41  
                 
Cash and cash equivalents, beginning of period   16,588     15,033     18,049     15,105  
Cash and cash equivalents, end of period $ 11,161   $ 15,146   $ 11,161   $ 15,146  
                 
Supplemental cash flow information:                
Interest paid $ 961   $ 975   $ 1,862   $ 1,848  
Income taxes paid, net $ 2,240   $ 2,663   $ 3,577   $ 5,006  
                 
Supplementary disclosure of non-cash investing and financing activities:                
Property and equipment acquired during the period not yet paid for $ 258   $ 232   $ 258   $ 232  
                 


 
Reconciliation of Net income to Adjusted EBITDA
(Dollar amounts in thousands of U.S. dollars)
                 
    Three months ended June 30,    Six months ended June 30, 
     2018   2017   2018   2017
    (unaudited)   (unaudited)
                  
Net income for the period  $ 3,608 $ 5,242   $ 7,352 $ 7,686  
Depreciation of property and equipment   1,330   879     2,562   1,636  
Amortization of intangible assets   2,326   2,063     4,657   3,825  
Interest expense, net   951   970     1,847   1,838  
Provision for income taxes   1,228   1,083     2,411   958  
Stock-based compensation   615   313     1,193   631  
Unrealized loss (gain) on change in fair value of forward contracts   46   (20 )   43   (38 )
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities   282   (283 )   459   (334 )
Acquisition and other costs1   802   127     1,043   509  
                 
Adjusted EBITDA $ 11,188 $ 10,374   $ 21,567 $ 16,711  
                 
                 
1Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to our acquisition of Enom in January 2017. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.
                 

This release includes forward-looking statements as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995 including statements regarding our expectations regarding our future financial results and, including, without limitation, our expectation regarding our ability to realize synergies from the Enom acquisition and our expectation for growth of Ting Internet. These statements are based on management’s current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Information about other potential factors that could affect Tucows’ business, results of operations and financial condition is included in the Risk Factors sections of Tucows’ filings with the Securities and Exchange Commission. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All forward-looking statements are based on information available to Tucows as of the date they are made. Tucows assumes no obligation to update any forward-looking statements, except as may be required by law.

Tucows, Ting, OpenSRS, Enom and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

Contact:
Lawrence Chamberlain
Loderock Advisors
(416) 519-4196
lawrence.chamberlain@loderockadvisors.com

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