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Tucows Reports Continuing Strong Financial Results for Fourth Quarter and Full Year 2018

2018 Highlighted by Record Revenue, Adjusted EBITDA2 and Cash Flow from Operations

TORONTO, Feb. 13, 2019 (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 fourth quarter ended December 31, 2018. All figures are in U.S. dollars.

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

  3 Months Ended December 31 12 Months Ended December 31
2018
(Unaudited)
2017
(Unaudited)
% Change 2018
(Unaudited)
2017
(Unaudited)
% Change
Net revenue 85,612 90,621 -6% 346,013 329,421 5%
Net income1 4,436 11,199 -60% 17,135 22,327 -23%
Basic Net earnings per common share1 0.42 1.06 -60% 1.62 2.12 -24%
Adjusted EBITDA2,3 16,633 15,276 9% 50,057 41,357 21%
Net cash provided by operating activities 10,668 14,081 -24% 37,209 31,896 17%
  1. Net Income and Earnings Per Share for the fourth quarter and Fiscal 2017 reflected a net positive implementation impact from the Tax Cuts and Jobs Act of 2017 of $5.8 million and $0.55 per share, respectively.
  2. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
  3. Adjusted EBITDA for the fourth quarter and twelve month period of 2017 reflect the impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Enom acquisition which lowered Adjusted EBITDA by $0.8 million and $7.8 million for the fourth quarter and twelve months of 2017, respectively.

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

  Revenue Gross profit
  3 Months ended 
December 31 
3 Months ended
December 31
  2018
(Unaudited)
2017
(Unaudited)
2018
(Unaudited)
2017
(Unaudited)
Network Access Services:
Mobile Services 22,511 23,795 11,093   11,094  
Other Services 2,320 1,590 1,429   651  
Total Network Access Services 24,831 25,385 12,522   11,745  
         
Domain Services:
Wholesale        
Domain Services 43,396 48,320 7,752   6,514  
Value Added Services 4,180 4,305 3,438   3,733  
Total Wholesale 47,576 52,625 11,190   10,247  
         
Retail 8,880 8,711 4,475   4,141  
Portfolio 4,325 3,900 3,900   3,376  
Total Domain Services 60,781 65,236 19,565   17,764  
         
Network Expenses:
Network, other costs - - (2,256 ) (2,260 )
Network, depreciation and amortization costs - - (2,100 ) (1,513 )
Total Network expenses - - (4,356 ) (3,773 )
         
Total 85,612 90,621 27,731   25,736  

“The fourth quarter once again saw solid, consistent performance across the business, highlighted by year-over-year gross profit expansion in both Domains and Network Access and 9% growth in adjusted EBITDA,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc.  “The quarter capped off another record year in terms of revenue, gross profit, adjusted EBITDA and cash flow from operations. As importantly, the cash generation of the Domains and Ting Mobile businesses fueled our build-out of the Ting Internet footprint that will drive our next phase of outsized growth.”

“Ting Internet made strong, steady progress throughout the year, growing our serviceable addresses, customers and recurring monthly revenue, adding a sixth town early in the year and readying for the seventh announced just last week. At Ting Mobile, we again delivered strong year-over-year growth in revenue, margin and gross profit. In our Domains business, we made significant progress in the integration of Enom, with more than half of the $5 million in expected EBITDA synergies now realized, as well as the development of the new platform, positioning this business for potential new growth opportunities.”

“All of these achievements position Tucows for an exciting 2019 in each of our businesses and improving growth that will drive long-term value for our shareholders.”

Financial Results

Net revenue for the fourth quarter of 2018 was $85.6 million compared with $90.6 million for the fourth quarter of 2017, with the decrease due primarily to acceleration of revenue related to the bulk transfer of 2.8 million very low margin domain names in the first and third quarters of 2018.  Excluding the impact of these of bulk transfers, net revenue for the fourth quarter of 2018 increased 2% compared to the fourth quarter of 2017.

Net income for the fourth quarter of 2018 was $4.4 million, or $0.42 per share compared with $11.2 million, or $1.06 per share, for the fourth quarter of 2017.  Net income for the fourth quarter of 2017 was positively impacted by the tax related implementation impacts from the Tax Cuts and Jobs Act of 2017 for $5.8 million or $0.55 per share.

Adjusted EBITDA1 for the fourth quarter of 2018 increased 9% to $16.6 million from $15.3 million for the fourth quarter of 2017. 

Cash and cash equivalents at the end of the fourth quarter of 2018 were $12.6 million compared with $10.8 million at the end of the third quarter of 2018 and $18.0 million at the end of the fourth 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 December 31 12 months ended December 31
  2018
(unaudited)
2017
(unaudited)
2018
(unaudited)
2017
(unaudited)
Net income for the period 4,436  11,199   17,135 22,327  
Depreciation of property and equipment   1,716   1,114   5,722 3,727  
Amortization of intangible assets   2,290   2,330   9,243 8,400  
Impairment of intangible assets - 110   - 111  
Interest expense, net   926 865   3,687 3,567  
Provision for income taxes 5,239   (1,032 ) 9,020 1,748  
Stock-based compensation 670 623   2,574 1,457  
Unrealized loss (gain) on change in fair value of forward contracts 201 54   207 18  
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities 752 (45 ) 943 (804 )
Acquisition and transition costs* 403   58    1,526 806  
         
Adjusted EBITDA   16,633   15,276   50,057 41,357  
*Acquisition 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.

Conference Call
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, February 18), 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 Tuesday, February 26 at approximately 4:00 p.m. ET.  All questions will receive a response, however, questions of a more specific nature 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 37,000 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) 
 
           
    December 31,   December 31,  
      2018     2017*  
    (unaudited)   (unaudited)  
           
Assets          
           
Current assets:          
Cash and cash equivalents   $   12,637     $   18,049  
Accounts receivable     10,837       12,376  
Inventory     3,775       2,944  
Prepaid expenses and deposits     15,472       14,186  
Prepaid domain name registry and ancillary services fees, current portion     87,782       103,302  
Income taxes recoverable     1,423       3,004  
Total current assets     131,926       153,861  
           
Prepaid domain name registry and ancillary services fees, long-term portion     18,745       23,701  
Property and equipment     48,065       24,620  
Contract costs     1,390       -  
Intangible assets     49,395       58,414  
Goodwill     90,054       90,054  
Total assets   $   339,575     $   350,650  
           
           
Liabilities and Stockholders' Equity          
           
Current liabilities:          
Accounts payable   $   8,445     $   7,026  
Accrued liabilities     5,899       6,412  
Customer deposits     11,919       15,255  
Derivative instrument liability     1,276       -  
Deferred rent, current portion     21       21  
Loan payable, current portion     18,400       18,290  
Deferred revenue, current portion     116,734       129,155  
Accreditation fees payable, current portion     985       1,175  
Income taxes payable     1,668       1,226  
Total current liabilities     165,347       178,560  
           
Deferred revenue, long-term portion     26,960       31,427  
Accreditation fees payable, long-term portion     250       289  
Deferred rent, long-term portion     116       130  
Loan payable, long-term portion     46,201       58,634  
Deferred Gain     -       429  
Deferred tax liability     20,925       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; 10,627,988 shares issued and outstanding as of December 31, 2018 and 10,583,879 shares issued and outstanding as of December 31, 2017     15,823       15,368  
Additional paid-in capital     3,953       2,167  
Retained earnings     60,810       42,676  
Accumulated other comprehensive income     (810 )     -  
Total stockholders' equity     79,776       60,211  
Total liabilities and stockholders' equity   $   339,575     $   350,650  
           
           
*The Company has initially applied ASC 2014-09 (Topic 606) using the modified retrospective method. Under this method, the comparative information is not restated.   
           

 

     Tucows  Inc.   
     Consolidated Statements of Operations   
     (Dollar amounts in thousands of U.S. dollars)   
                 
     
Three months ended December 31, 
   
Year ended December 31, 
    2018     20171     2018     20171  
     (unaudited)     (unaudited) 
                 
Net revenues $   85,612   $   90,621   $   346,013   $   329,421  
                 
Cost of revenues:                
Cost of revenues     53,525       61,112       232,103       230,600  
Network expenses (*)     2,256       2,260       9,846       9,324  
Depreciation of property and equipment     1,601       1,014       5,298       3,142  
Amortization of intangible assets     499       499       1,996       1,834  
Total cost of revenues   57,881     64,885     249,243     244,900  
                 
Gross profit   27,731     25,736     96,770     84,521  
                 
Expenses:                
Sales and marketing (*)     8,434       7,372       33,063       29,423  
Technical operations and development (*)     2,091       1,855       8,748       7,258  
General and administrative (*)     4,804       3,468       17,710       13,594  
Depreciation of property and equipment     115       100       424       585  
Amortization of intangible assets     1,791       1,831       7,247       6,566  
Impairment of indefinite life intangible assets   -     110     -     111  
Loss (gain) on currency forward contracts     232       17       254       (98 )
Total expenses   17,467     14,753     67,446     57,439  
                 
Income from operations   10,264     10,983     29,324     27,082  
                 
Other income (expenses):                
Interest expense, net   (926 )   (865 )   (3,687 )   (3,567 )
Other income, net   337     49     518     560  
Total other income (expenses)   (589 )   (816 )   (3,169 )   (3,007 )
                 
Income before provision for income taxes   9,675     10,167     26,155     24,075  
                 
Provision for income taxes   5,239     (1,032 )   9,020     1,748  
Net income before redeemable non-controlling interest   4,436     11,199     17,135     22,327  
                 
Redeemable non-controlling interest   -       (75 )     (26 )     (387 )
                 
Net income attributable to redeemable non-controlling interest   -     75     26     387  
Net income for the period   4,436     11,199     17,135     22,327  
                 
Other comprehensive income, net of tax                
Unrealized income (loss) on hedging activities   (910 )   (88 )   (1,022 )   550  
Net amount reclassified to earnings   136     (234 )   212     (650 )
Other comprehensive income (loss) net of tax of $ 241 and $ 183 for the three months ended December 31, 2018 and  December 31, 2017, $ 259 and $ - for the year ended December 31, 2018 and  December 31, 2017   (774 )   (322 )   (810 )   (100 )
                 
Comprehensive income, net of tax for the period  $  3,662    $  10,877    $  16,325    $  22,227  
                 
Basic earnings per common share $ 0.42   $ 1.06   $ 1.62   $ 2.12  
                 
Shares used in computing basic earnings per common share   10,621,181     10,580,429     10,604,722     10,537,356  
                 
Diluted earnings per common share $ 0.41   $ 1.04   $ 1.59   $ 2.07  
                 
Shares used in computing diluted earnings per common share   10,791,940     10,802,817     10,794,170     10,793,622  
                 
                 
                 
(*) Stock-based compensation has been included in expenses as follows:                
Network expenses $ 70   $ 50   $ 223   $ 110  
Sales and marketing $ 286   $ 255   $ 1,025   $ 573  
Technical operations and development $ 135   $ 145   $ 636   $ 360  
General and administrative $ 179   $ 173   $ 690   $ 414  
                 
1The Company has initially applied ASC 2014-09 (Topic 606) using the modified retrospective method. Under this method, the comparative information is not restated. 

 

     Tucows  Inc.   
     Consolidated Statements of Cash Flows   
      (Dollar amounts in thousands of U.S. dollars)   
                 
    
Three months ended December 31, 
   
Year ended December 31, 
    2018     2017*   2018     2017*
Cash provided by:  (unaudited)     (unaudited) 
Operating activities:                
 Net income for the period   $  4,436   $ 11,199    $  17,135   $ 22,327  
Items not involving cash:                
Depreciation of property and equipment   1,716     1,114     5,722     3,727  
Loss on write off of property and equipment   -     -     -     17  
Amortization of debt discount and issuance costs   70     69     281     273  
Amortization of intangible assets   2,290     2,330     9,243     8,400  
Net amortization contract costs   (7 )   -     14     -  
Impairment of indefinite life intangible asset   -     110     -     111  
Deferred income taxes (recovery)   1,899     (326 )   1,038     (3,337 )
Excess tax benefits on share-based compensation expense   (165 )   (181 )   (697 )   (2,796 )
Amortization of deferred rent   (5 )   -     (14 )   6  
Loss on disposal of domain names   271     266     341     291  
Other income   (258 )   (129 )   (429 )   (515 )
Loss (gain) on change in the fair value of forward contracts   194     54     207     17  
Stock-based compensation   670     623     2,574     1,457  
Change in non-cash operating working capital:                
Accounts receivable   692     1,340     1,539     1,010  
Inventory   (635 )   5     (831 )   (1,733 )
Prepaid expenses and deposits   (918 )   527     (1,286 )   (1,642 )
Prepaid domain name registry and ancillary services fees   4,699     3,460     20,476     4,030  
Income taxes recoverable   2,398     (2,241 )   2,691     (426 )
Accounts payable   (877 )   856     171     (3,826 )
Accrued liabilities   (978 )   (2,269 )   (513 )   (1,275 )
Customer deposits   34     (78 )   (3,336 )   1,085  
Deferred revenue   (4,798 )   (2,610 )   (16,888 )   4,933  
Accreditation fees payable   (60 )   (38 )   (229 )   (238 )
Net cash provided by operating activities   10,668     14,081     37,209     31,896  
                 
Financing activities:                
Proceeds received on exercise of stock options   50     48     112     222  
Payment of tax obligations resulting from net exercise of stock options   (41 )   (23 )   (445 )   (1,462 )
Proceeds received on loan payable   4,500     -     7,000     86,998  
Repayment of loan payable   (4,384 )   (4,572 )   (19,596 )   (19,976 )
Payment of loan payable costs   -     -     (8 )   (620 )
Net cash (used in) provided by financing activities   125     (4,547 )   (12,937 )   65,162  
                 
Investing activities:                
Additions to property and equipment   (8,480 )   (3,474 )   (27,919 )   (12,935 )
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   (451 )   (558 )   (565 )   (2,942 )
Net cash used in investing activities   (8,931 )   (4,032 )   (29,684 )   (94,114 )
                 
(Decrease) increase in cash and cash equivalents   1,862     5,502     (5,412 )   2,944  
                 
Cash and cash equivalents, beginning of period     10,775       12,547       18,049       15,105  
Cash and cash equivalents, end of period $ 12,637   $ 18,049   $ 12,637   $ 18,049  
                 
Supplemental cash flow information:                
Interest paid $ 931    $  871   $ 3,712    $  3,587  
Income taxes paid, net $ 1,742    $  1,502   $ 7,112    $  7,815  
                 
Supplementary disclosure of non-cash investing and financing activities:                
Property and equipment acquired during the period not yet paid for $ 1,462   $ 214   $ 1,462   $ 214  
                 
*The Company has initially applied ASC 2014-09 (Topic 606) using the modified retrospective method. Under this method, the comparative information is not restated. 
                 

 

Reconciliation of Net income to Adjusted EBITDA                  
(In Thousands of US Dollars)                   
(unaudited)                   
                   
                   
     Three months ended December 31,   Year ended December 31,  
     2018 (unaudited)   2017 (unaudited)   2018 (unaudited)   2017 (unaudited)  
                    
Net income for the period  $   4,436 $   11,199    $    17,135 $   22,327    
Depreciation of property and equipment      1,716     1,114       5,722     3,727    
Amortization of intangible assets      2,290     2,330       9,243     8,400    
Impairment of intangible assets     -      110       -      111    
Interest expense, net     926     865       3,687     3,567    
Provision for income taxes      5,239     (1,032 )     9,020     1,748    
Stock-based compensation     670     623       2,574     1,457    
Unrealized loss (gain) on change in fair value of forward contracts     201     54       207     18    
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities     752     (45 )     943     (804 )  
Acquisition and other costs1     403     58       1,526     806    
                   
Adjusted EBITDA $   16,633 $   15,276   $   50,057 $   41,357    
                   
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