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Tucows Reports Continuing Strong Financial Results for Third Quarter 2018

TORONTO, Nov. 07, 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 third quarter ended September 30, 2018. All figures are in U.S. dollars.

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

  3 Months Ended September 30 9 Months Ended September 30
   
2018
(Unaudited)
2017
(Unaudited)
% Change 2018
(Unaudited)
2017
(Unaudited)
% Change
Net revenue 83,519 85,008 -2 % 260,401 238,800 9 %
Net income 5,346 3,440 55 % 12,698 11,128 14 %
Basic Net earnings per common share 0.50 0.33 52 % 1.20 1.06 13 %
Adjusted EBITDA1 11,858 9,368 27 % 33,425 26,082 28 %
Net cash provided by operating activities 11,214 7,282 54 % 26,541 17,814 49 %
  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
September 30 
3 Months ended
September 30
  2018
(Unaudited)
2017
(Unaudited)
2018
(Unaudited)
2017
(Unaudited)
Network Access Services:
Mobile Services 22,546 21,749 11,147   9,384  
Other Services 2,033 1,442 1,161   847  
Total Network Access Services 24,579 23,191 12,308   10,231  
         
Domain Services:
Wholesale        
Domain Services 45,070 47,770 7,656   5,477  
Value Added Services 4,541 4,203 3,734   3,516  
Total Wholesale 49,611 51,973 11,390   8,993  
         
Retail 8,731 8,873 4,266   4,262  
Portfolio 598 971 450   791  
Total Domain Services 58,940 61,817 16,106   14,046  
         
Network Expenses:

Network, other costs - - (2,315 ) (2,461 )
Network, depreciation and amortization costs - - (1,838 ) (1,322 )
Total Network expenses - - (4,153 ) (3,783 )
         
Total revenue/gross margin 83,519 85,008 24,261   20,494  

“Our third quarter results again demonstrate how the consistent performance and cash flow generation of our Domains and Ting Mobile businesses are enabling us to invest in the build out of the Ting Internet footprint for our next phase of outsized growth,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Gross margin contribution expanded in each of our businesses, with Domains benefiting from normalized margins following the Enom acquisition and Network Access benefiting from Ting Mobile’s lower costs, a larger subscriber base and higher usage per subscriber, as we continue to reposition our offering for renewed growth.  Importantly, Ting Internet continues to steadily advance its network builds, grow its number of serviceable addresses, and expand its subscriber base.  We now have five fully active towns where we are installing, activating and supporting customers every day.”

Financial Results

Net revenue for the third quarter of 2018 was $83.5 million compared with $85.0 million for the third quarter of 2018, with the decrease due primarily to acceleration of revenue in the first quarter of 2018 related to the bulk transfer of 2.65 million very low margin domain names, which was partially offset by the continued growth of Ting Mobile and a bulk transfer of 0.2 million very low margin domains names in the third quarter of 2018.  Excluding the impact of these of bulk transfers, net revenue for the third quarter of 2018 increased 3.5% compared to the third quarter of 2017.

Net income for the third quarter of 2018 increased 55% to $5.3 million, or $0.50 per share from $3.4 million, or $0.33 per share, for the third quarter of 2017.

Adjusted EBITDA1 for the third quarter of 2018 increased 27% to $11.9 million from $9.4 million for the third quarter of 2017. 

Cash and cash equivalents at the end of the third quarter of 2018 was $10.8 million compared with $11.2 million at the end of the second quarter of 2018 and $12.5 million at the end of the third 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 September 30 9 months ended September 30
     
  2018
(unaudited)
2017
(unaudited)
2018
(unaudited)
2017
(unaudited)
Net income for the period 5,346   3,440   12,698 11,128  
Depreciation of property and equipment 1,445   978   4,007 2,614  
Amortization of intangible assets 2,296   2,245   6,953 6,070  
Impairment of intangible assets -   2   - 2  
Interest expense, net 914   864   2,761 2,703  
Provision for income taxes 1,370   1,823   3,781 2,781  
Stock-based compensation 711   203   1,904 834  
Unrealized loss (gain) on change in fair value of forward contracts (35 ) 1   7 (37 )
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities (269 ) (427 ) 191 (761 )
Acquisition and transition costs* 80   239   1,123 748  
         
Adjusted EBITDA 11,858   9,368   33,425 26,082  
*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
As per its new quarterly conference call format initiated last quarter, 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 Tucows web site at http://www.tucows.com/investors/financials.  In lieu of a live question and answer period, for the next five days (until Monday, November 12), shareholders, analysts and prospective investors 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 Friday, November 16 at approximately 4:00 p.m. ET.  All questions will receive a response, however, questions of a more specific may be responded to directly.

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 23 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) 
           
    September 30,   December 31,  
     2018    2017  
    (unaudited)   (unaudited)  
           
Assets          
           
Current assets:          
Cash and cash equivalents   $   10,775     $   18,049  
Accounts receivable     11,529       12,376  
Inventory     3,140       2,944  
Prepaid expenses and deposits     14,554       14,186  
Prepaid domain name registry and ancillary services fees, current portion     91,590       103,302  
Income taxes recoverable     3,109       3,004  
Total current assets     134,697       153,861  
           
Prepaid domain name registry and ancillary services fees, long-term portion     19,636       23,701  
Property and equipment     40,220       24,620  
Contract costs     1,383       -  
Intangible assets     51,505       58,414  
Goodwill     90,054       90,054  
Total assets   $   337,495     $   350,650  
           
           
Liabilities and Stockholders' Equity          
           
Current liabilities:          
Accounts payable   $   8,242     $   7,026  
Accrued liabilities     6,877       6,412  
Customer deposits     11,885       15,255  
Derivative instrument liability     62       -  
Deferred rent, current portion     21       21  
Loan payable, current portion     17,810       18,290  
Deferred revenue, current portion     120,459       129,155  
Accreditation fees payable, current portion     1,035       1,175  
Income taxes payable     1,128       1,226  
Total current liabilities     167,519       178,560  
           
Deferred revenue, long-term portion     28,033       31,427  
Accreditation fees payable, long-term portion     260       289  
Deferred rent, long-term portion     121       130  
Loan payable, long-term portion     46,605       58,634  
Deferred Gain     258       429  
Deferred tax liability     19,265       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; 10,615,566 shares issued and outstanding as of September 30, 2018 and 10,583,879 shares issued and outstanding as of December 31, 2017     15,635       15,368  
Additional paid-in capital     3,462       2,167  
Retained earnings     56,373       42,676  
Accumulated other comprehensive income     (36 )     -  
Total stockholders' equity     75,434       60,211  
Total liabilities and stockholders' equity   $   337,495     $   350,650  
           

 

Tucows  Inc.  
Consolidated Statements of Operations  
(Dollar amounts in thousands of U.S. dollars)  
                 
    Three months ended September 30, 
   Nine months ended September 30, 
    2018   2017   2018   2017 
                     
    (unaudited)   (unaudited)
                 
Net revenues $   83,519   $   85,008   $   260,401   $   238,800  
                 
Cost of revenues:                
Cost of revenues     55,105       60,731       178,578       169,488  
Network expenses (*)     2,315       2,461       7,590       7,064  
Depreciation of property and equipment     1,339       823       3,698       2,128  
Amortization of intangible assets     499       499       1,497       1,335  
Total cost of revenues   59,258     64,514     191,363     180,015  
                 
Gross profit   24,261     20,494     69,038     58,785  
                 
Expenses:                
Sales and marketing (*)     8,412       7,384       24,629       22,051  
Technical operations and development (*)     2,207       1,910       6,657       5,402  
General and administrative (*)     4,120       3,381       12,906       10,124  
Depreciation of property and equipment     106       155       309       486  
Amortization of intangible assets     1,797       1,746       5,456       4,735  
Impairment of indefinite life intangible assets   -     2     -     2  
Loss (gain) on currency forward contracts     (27 )     (54 )     22       (115 )
Total expenses   16,615     14,524     49,979     42,685  
                 
Income from operations   7,646     5,970     19,059     16,100  
                 
Other income (expenses):                
Interest expense, net   (914 )   (864 )   (2,761 )   (2,703 )
Other income, net   (16 )   157     181     512  
Total other income (expenses)   (930 )   (707 )   (2,580 )   (2,191 )
                 
Income before provision for income taxes   6,716     5,263     16,479     13,909  
                 
Provision for income taxes   1,370     1,823     3,781     2,781  
Net income before redeemable non-controlling interest   5,346     3,440     12,698     11,128  
                 
Redeemable non-controlling interest   -       (69 )     (26 )     (312 )
                 
Net income attributable to redeemable non-controlling interest   -     69     26     312  
Net income for the period   5,346     3,440     12,698     11,128  
                 
Other comprehensive income, net of tax                
Unrealized income (loss) on hedging activities   144     309     (112 )   638  
Net amount reclassified to earnings   63     (318 )   76     (416 )
Other comprehensive income (loss) net of tax of $ (59) and $ 5 for the three months ended September 30, 2018 and  September 30, 2017, $ 19 and $ (127) for the nine months ended September 30, 2018 and  September 30, 2017   207     (9 )   (36 )   222  
                 
Comprehensive income, net of tax for the period  $  5,553    $  3,431    $  12,662    $  11,350  
                 
Basic earnings per common share $ 0.50   $ 0.33   $ 1.20   $ 1.06  
                 
Shares used in computing basic earnings per common share   10,611,579     10,564,311     10,599,243     10,522,841  
                 
Diluted earnings per common share $ 0.50   $ 0.32   $ 1.18   $ 1.03  
                 
Shares used in computing diluted earnings per common share   10,794,297     10,785,342     10,795,668     10,785,050  
                 
                 
                 
(*) Stock-based compensation has been included in expenses as follows:                
Network expenses $ 70   $ 52   $ 153   $ 60  
Sales and marketing $ 307   $ 197   $ 739   $ 318  
Technical operations and development $ 150   $ 96   $ 501   $ 215  
General and administrative $ 184   $ (143 ) $ 511   $ 241  
                 

 

Tucows  Inc.   
Consolidated Statements of Cash Flows   
(Dollar amounts in thousands of U.S. dollars)   
                 
    Three months ended September 30, 
   Nine months ended September 30, 
    2018    2017   2018   2017
                 
Cash provided by:    (unaudited)    (unaudited)
Operating activities:                
Net income for the period   $  5,346   $ 3,440    $  12,698   $ 11,128  
Items not involving cash:                
Depreciation of property and equipment   1,445     978     4,007     2,614  
Loss on write off of property and equipment   -     8     -     17  
Amortization of debt discount and issuance costs   72     57     211     204  
Amortization of intangible assets   2,296     2,245     6,953     6,070  
Impairment of indefinite life intangible asset   -     2     -     2  
Change in capitalized contract costs   (29 )   -     21     -  
Deferred income taxes (recovery)   (369 )   (1,445 )   (861 )   (3,011 )
Excess tax benefits on share-based compensation expense   (191 )   (444 )   (532 )   (2,615 )
Amortization of deferred rent   (5 )   -     (9 )   6  
Loss on disposal of domain names   5     8     70     25  
Other income   -     (129 )   (171 )   (386 )
Loss (gain) on change in the fair value of forward contracts   (30 )   1     13     (37 )
Stock-based compensation   711     203     1,904     834  
Change in non-cash operating working capital:                
Accounts receivable   685     533     847     (332 )
Inventory   108     (643 )   (196 )   (1,739 )
Prepaid expenses and deposits   874     202     (368 )   (2,169 )
Prepaid domain name registry and ancillary services fees   4,229     3,084     15,777     570  
Income taxes recoverable   (137 )   2,225     293     1,815  
Accounts payable   778     (644 )   1,048     (4,682 )
Accrued liabilities   107     981     465     994  
Customer deposits   (1,049 )   (1,905 )   (3,370 )   1,163  
Deferred revenue   (3,559 )   (1,425 )   (12,090 )   7,543  
Accreditation fees payable   (73 )   (50 )   (169 )   (200 )
Net cash provided by operating activities   11,214     7,282     26,541     17,814  
                 
Financing activities:                
Proceeds received on exercise of stock options   23     68     62     173  
Payment of tax obligations resulting from net exercise of stock options   (116 )   (117 )   (404 )   (1,438 )
Proceeds received on loan payable   -     -     2,500     86,998  
Repayment of loan payable   (4,387 )   (4,573 )   (15,212 )   (15,403 )
Payment of loan payable costs   (4 )   (16 )   (8 )   (620 )
Net cash (used in) provided by financing activities   (4,484 )   (4,638 )   (13,062 )   69,710  
                 
Investing activities:                
Additions to property and equipment   (7,003 )   (2,859 )   (19,439 )   (9,461 )
Acquisition of a portion of the minority interest in Ting Virginia, LLC   -     -     (1,200 )   (2,000 )
Acquisition of Enom Incorporated, net of cash   -     -     -     (76,237 )
Acquisition of intangible assets   (113 )   (2,384 )   (114 )   (2,384 )
Net cash used in investing activities   (7,116 )   (5,243 )   (20,753 )   (90,082 )
                 
Decrease in cash and cash equivalents   (386 )   (2,599 )   (7,274 )   (2,558 )
                 
Cash and cash equivalents, beginning of period     11,161       15,146       18,049       15,105  
Cash and cash equivalents, end of period $ 10,775   $ 12,547   $ 10,775   $ 12,547  
                 
Supplemental cash flow information:                
Interest paid $ 919    $  870   $ 2,781    $  2,717  
Income taxes paid, net $ 1,793    $  1,308   $ 5,370    $  6,313  
                 
Supplementary disclosure of non-cash investing and financing activities:                
Property and equipment acquired during the period not yet paid for $ 382   $ 186   $ 382   $ 186  
                 


Reconciliation of Net income to Adjusted EBITDA 
(In Thousands of US Dollars)  
(unaudited)  
                   
                   
     Three months ended September 30,    Nine months ended September 30,   
     2018 (unaudited)   2017 (unaudited)   2018 (unaudited)   2017 (unaudited)  
                    
Net income for the period  $   5,346   $   3,440       12,698 $   11,128    
Depreciation of property and equipment      1,445       978       4,007     2,614    
Amortization of intangible assets      2,296       2,245       6,953     6,070    
Impairment of intangible assets     -        2       -      2    
Interest expense, net     914       864       2,761     2,703    
Provision for income taxes      1,370       1,823       3,781     2,781    
Stock-based compensation     711       203       1,904     834    
Unrealized loss (gain) on change in fair value of forward contracts     (35 )     1       7     (37 )  
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities     (269 )     (427 )     191     (761 )  
Acquisition and other costs1     80       239       1,123     748    
                   
Adjusted EBITDA $   11,858   $   9,368       33,425 $   26,082    
                   
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