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Tucows Reports Financial Results for First Quarter 2019

TORONTO, May 08, 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 first quarter ended March 31, 2019. All figures are in U.S. dollars.

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

  3 Months Ended March 31
2019
(Unaudited)
2018
(Unaudited)
% Change
Net revenue1,2 78,953 95,795 -18%
Net income 2,799 3,744 -25%
Basic Net earnings per common share3 0.26 0.35 -26%
Adjusted EBITDA3,4 9,431 10,378 -9%
Net cash provided by operating activities 8,991 9,573 -6%
  1. Tucows first quarter 2019 results include 13 days of contribution of Ascio Technologies (“Ascio”), which the Company acquired on March 18, 2019.
  2. Net revenue for the first quarter of 2018 included the recognition of $14.6 million in accelerated revenue related to the bulk transfer of nearly 2.65 million very low-margin domain names during that period.
  3. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
  4. Adjusted EBITDA for the first quarter of 2019 reflects the impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Ascio acquisition on March 18, 2019, which lowered Adjusted EBITDA by $0.2 million.

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

  Revenue Gross profit
  3 Months ended
March 31 
3 Months ended
March 31
  2019
(Unaudited)
2018
(Unaudited)
2019
(Unaudited)
2018
(Unaudited)
Network Access Services:
Mobile Services 20,809 21,872 10,066 10,606
Other Services 2,443 1,736 1,374 795
Total Network Access Services 23,252 23,608 11,440 11,401
         
Domain Services:
Wholesale        
Domain Services 42,591 58,428 7,752 7,114
Value Added Services 4,184 4,434 3,390 3,577
Total Wholesale 46,775 62,862 11,142 10,691
         
Retail 8,642 8,436 4,283 4,027
Portfolio 284 889 156 704
Total Domain Services 55,701 72,187 15,581 15,422
         
Network Expenses:
Network, other costs - - (2,395) (2,574)
Network, depreciation and amortization costs - - (1,975) (1,630)
Total Network expenses - - (4,370) (4,204)
         
Total 78,953 95,795 22,651 22,619

“Our Domain Services and Ting Mobile businesses continue to generate strong cash flows to support our investment in our outsized Ting Internet opportunity,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc.  “During the first quarter, we saw continuing steady progress on Ting Internet, as we further expanded our networks, increased the number of serviceable addresses, and grew our subscriber base. We also added our seventh town, Wake Forest, North Carolina, followed shortly thereafter by our eighth, Fullerton, California, just after quarter end.  Our solid start to the year positions Tucows for improved growth in 2019 and beyond.”

Financial Results

Net revenue for the first quarter of 2019 was $79.0 million compared with $95.8 million for the first quarter of 2018, with the first quarter of 2018 benefitting from accelerated revenue recognition of $14.6 million related to a bulk transfer of 2.65 million domain names during that period.  Excluding the impact of the accelerated revenue, net revenue for the first quarter of 2019 decreased 3% compared to the first quarter of 2018.

Net income for the first quarter of 2019 was $2.8 million, or $0.26 per share, compared with $3.7 million, or $0.35 per share, for the first quarter of 2018.

Adjusted EBITDA5 for the first quarter of 2019 was $9.4 million compared with $10.4 million for the first quarter of 2018.  Adjusted EBITDA for the first quarter 2019 reflects the impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Ascio acquisition, which lowered Adjusted EBITDA by $0.2 million.  The estimated impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue on Adjusted EBITDA is approximately $3.0 million, the majority of which will be reflected in our 2019 financial results. 

Cash and cash equivalents at the end of the first quarter of 2019 were $11.0 million compared with $12.6 million at the end of the fourth quarter of 2018 and $16.6 million at the end of the first quarter of 2018.

Notes:

5. 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 transition 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 March 31
  2019 (unaudited) 2018 (unaudited)
Net income for the period 2,799 3,744
Depreciation of property and equipment   1,925   1,232
Amortization of intangible assets   2,040   2,331
Interest expense, net   972 896
Provision for income taxes 1,257   1,183
Stock-based compensation 525 578
Unrealized loss (gain) on change in fair value of forward contracts (118) (3)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities (328) 176
Acquisition and transition costs* 359  241
     
Adjusted EBITDA   9,431   10,378
*Acquisition and other costs represent transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to the Company’s acquisition of Enom in January 2017 and Ascio in March 2019.  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 six days (until Tuesday, May 14), 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, May 21 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), Enom (http://www.enom.com) and Ascio (http://ascio.com) manage a combined 25 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)
         
    March 31,   December 31,
      2019     2018*
    (unaudited)   (unaudited)
         
Assets        
         
Current assets:        
Cash and cash equivalents   $   11,035     $   12,637  
Accounts receivable     13,120       10,837  
Inventory     3,367       3,775  
Prepaid expenses and deposits     16,498       15,472  
Prepaid domain name registry and ancillary services fees, current portion   99,962       87,782  
Income taxes recoverable     2,048       1,423  
Total current assets     146,030       131,926  
         
Prepaid domain name registry and ancillary services fees, long-term portion     18,599       18,745  
Property and equipment     55,486       48,065  
Right of use operating lease     12,206       -  
Contract costs     1,371       1,390  
Intangible assets     61,991       49,395  
Goodwill     109,777       90,054  
Total assets   $   405,460     $   339,575  
         
         
Liabilities and Stockholders' Equity        
         
Current liabilities:        
Accounts payable   $   8,459     $   8,445  
Accrued liabilities     8,055       5,899  
Customer deposits     14,571       11,919  
Derivative instrument liability     353       1,276  
Deferred rent, current portion     -       21  
Operating lease liability, current portion     1,917       -  
Loan payable, current portion     24,788       18,400  
Deferred revenue, current portion     131,801       116,734  
Accreditation fees payable, current portion     1,076       985  
Income taxes payable     702       1,668  
Total current liabilities     191,722       165,347  
         
Deferred revenue, long-term portion     27,618       26,960  
Accreditation fees payable, long-term portion     239       250  
Deferred rent, long-term portion     -       116  
Operating lease liability, long-term portion     9,793       -  
Loan payable, long-term portion     68,026       46,201  
Deferred Gain     -       -  
Deferred tax liability     24,621       20,925  
         
Redeemable non-controlling interest     -       -  
         
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; 10,643,750 shares issued and outstanding as of March 31, 2019 and 10,627,988 shares issued and outstanding as of December 31, 2018     16,188       15,823  
Additional paid-in capital     3,844       3,953  
Retained earnings     63,609       60,810  
Accumulated other comprehensive income     (200 )     (810 )
Total stockholders' equity     83,441       79,776  
                 
Total liabilities and stockholders' equity   $   405,460     $   339,575  
         
         
*The Company has initially applied ASC 2016-02 (Topic 842) using the modified retrospective method. Under this method, the comparative information is not restated. 
         

 

Tucows  Inc.
Consolidated Statements of Operations and Comprehensive Income
(Dollar amounts in thousands of U.S. dollars) 
 
       
     
Three months ended March 31, 
 
    2019     20181    
     (unaudited)   
           
Net revenues $   78,953   $   95,795    
           
Cost of revenues:          
Cost of revenues     51,932       68,972    
Network expenses (*)     2,395       2,574    
Depreciation of property and equipment     1,801       1,131    
Amortization of intangible assets     174       499    
Total cost of revenues   56,302     73,176    
           
Gross profit   22,651     22,619    
           
Expenses:          
Sales and marketing (*)     8,741       8,365    
Technical operations and development (*)     2,523       2,095    
General and administrative (*)     4,448       4,530    
Depreciation of property and equipment     124       101    
Amortization of intangible assets     1,866       1,832    
Loss (gain) on currency forward contracts     (79 )     (3 )  
Total expenses   17,623     16,920    
           
Income from operations   5,028     5,699    
           
Other income (expenses):          
Interest expense, net   (972 )   (896 )  
Other income, net   -     124    
Total other income (expenses)   (972 )   (772 )  
           
Income before provision for income taxes   4,056     4,927    
           
Provision for income taxes   1,257     1,183    
Net income before redeemable non-controlling interest   2,799     3,744    
           
Redeemable non-controlling interest   -       (26 )  
           
Net income attributable to redeemable non-controlling interest   -     26    
Net income for the period   2,799     3,744    
           
Other comprehensive income, net of tax          
Unrealized income (loss) on hedging activities   549     17    
Net amount reclassified to earnings   61     -    
Other comprehensive income (loss) net of tax of $ (194) and $ (6) for the three months ended March 31, 2019 and  March 31, 2018   610     17    
           
Comprehensive income, net of tax for the period  $ 3,409    $ 3,761    
           
Basic earnings per common share $ 0.26   $ 0.35    
           
Shares used in computing basic earnings per common share   10,634,842     10,588,718    
           
Diluted earnings per common share $ 0.26   $ 0.35    
           
Shares used in computing diluted earnings per common share   10,835,897     10,792,613    
           
           
           
(*) Stock-based compensation has been included in expenses as follows:          
Network expenses $ 57   $ 56    
Sales and marketing $ 196   $ 188    
Technical operations and development $ 117   $ 177    
General and administrative $ 155   $ 159    
           
1The Company has initially applied ASC 2016-02 (Topic 842) 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 March 31, 
 
    2019     2018*  
             
Cash provided by:    (unaudited)   
Operating activities:          
Net income for the period   $  2,799   $ 3,744    
Items not involving cash:          
Depreciation of property and equipment   1,925     1,232    
Loss on write off of property and equipment   22     -    
Amortization of debt discount and issuance costs   78     70    
Amortization of intangible assets   2,040     2,331    
Net amortization contract costs   19     25    
Deferred income taxes (recovery)   462     (47 )  
Excess tax benefits on share-based compensation expense   (356 )   (144 )  
Net Right of use operating assets/Operating lease liability   (30 )   -    
Loss on disposal of domain names   4     37    
Other income   -     (129 )  
Loss (gain) on change in the fair value of forward contracts   (118 )   (3 )  
Stock-based compensation   525     578    
Change in non-cash operating working capital:          
Accounts receivable   (1,188 )   (309 )  
Inventory   408     46    
Prepaid expenses and deposits   (390 )   (525 )  
Prepaid domain name registry and ancillary services fees   (1,716 )   11,344    
Income taxes recoverable   (1,236 )   265    
Accounts payable   786     2,132    
Accrued liabilities   1,321     759    
Customer deposits   287     (2,275 )  
Deferred revenue   3,269     (9,598 )  
Accreditation fees payable   80     40    
Net cash provided by operating activities   8,991     9,573    
           
Financing activities:          
Proceeds received on exercise of stock options   72     7    
Payment of tax obligations resulting from net exercise of stock options   (339 )   (147 )  
Proceeds received on loan payable   32,940     -    
Repayment of loan payable   (4,600 )   (4,572 )  
Payment of loan payable costs   (207 )   (4 )  
Net cash (used in) provided by financing activities   27,866     (4,716 )  
           
Investing activities:          
Additions to property and equipment   (10,435 )   (5,117 )  
Acquisition of a portion of the minority interest in Ting Virginia, LLC   -     (1,200 )  
Acquisition of Ascio Technologies Inc. (net of cash of $1,437)   (28,024 )   -    
Acquisition of intangible assets   -     (1 )  
Net cash used in investing activities   (38,459 )   (6,318 )  
           
(Decrease) increase in cash and cash equivalents   (1,602 )   (1,461 )  
           
Cash and cash equivalents, beginning of period     12,637       18,049    
Cash and cash equivalents, end of period $ 11,035   $ 16,588    
           
Supplemental cash flow information:          
Interest paid $ 976    $  901    
Income taxes paid, net $ 2,118    $  1,337    
           
Supplementary disclosure of non-cash investing and financing activities:          
Property and equipment acquired during the period not yet paid for $ 392   $ 398    
           
*The Company has initially applied ASC 2016-02 (Topic 842) 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 March 31,
     2019 (unaudited)   2018 (unaudited)
          
Net income for the period  $   2,799   $   3,744  
Depreciation of property and equipment      1,925       1,232  
Amortization of intangible assets      2,040       2,331  
Interest expense, net     972       896  
Provision for income taxes      1,257       1,183  
Stock-based compensation     525       578  
Unrealized loss (gain) on change in fair value of forward contracts     (118 )     (3 )
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities     (328 )     176  
Acquisition and other costs1     359       241  
         
Adjusted EBITDA $   9,431   $   10,378  
         
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 and Ascio in March 2019. 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 expectations 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, Ascio and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

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