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Tucows Reports Financial Results for Second Quarter 2019

TORONTO, Aug. 07, 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 second quarter ended June 30, 2019. 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
2019
(Unaudited)
2018
(Unaudited)
% Change 2019
(Unaudited)
2018
(Unaudited)
% Change
Net revenue 84,117 81,087 4% 163,070 176,882 -8%
Net income 2,616 3,608 -28% 5,415 7,352 -26%
Basic Net earnings per common share 0.25 0.34 -26% 0.51 0.69 -26%
Adjusted EBITDA1,2 11,486 11,188 3% 20,917 21,567 -3%
Net cash provided by operating activities 6,979 5,754 21% 15,970 15,327 4%
  1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
  2. Adjusted EBITDA for the second quarter and first six months of 2019 reflect 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 $0.7 million and $0.8 million, respectively.
     
Summary of Revenues and Gross profit
(In Thousands of US Dollars)
     
  Revenue Gross Profit
  3 Months ended June 30  3 Months ended June 30
  2019
(Unaudited)
2018
(Unaudited)
2019
(Unaudited)
2018
(Unaudited)
Network Access Services:
Mobile Services 20,986 22,411 10,180   10,433  
Other Services 2,644 1,895 1,688   605  
Total Network Access Services 23,630 24,306 11,868   11,038  
         
Domain Services:
Wholesale        
Domain Services 46,485 42,540 8,668   6,696  
Value Added Services 4,775 4,601 4,037   3,853  
Total Wholesale 51,260 47,141 12,705   10,549  
         
Retail 8,783 8,477 4,374   4,031  
Portfolio 444 1,163 297   968  
Total Domain Services 60,487 56,781 17,376   15,548  
         
Network Expenses:
Network, other costs - - (2,385 ) (2,701 )
Network, depreciation and amortization costs - - (2,352 ) (1,727 )
Total Network expenses - - (4,737 ) (4,428 )
         
Total 84,117 81,087 24,507   22,158  
             

“The second quarter of 2019 was highlighted by year-over-year growth in revenue and gross margin as our domains and Ting Mobile businesses continued to generate strong cash flows to invest in our long-term Ting Internet growth opportunity,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc.  “The second quarter saw continued steady progress at Ting Internet, marked by our best quarter ever in terms of new subscribers, continued expansion in the number of serviceable addresses, and our highest ever level of capital expenditure as we continue to build out the network for the long-term growth of the business.”

Financial Results

Net revenue for the second quarter of 2019 increased 4% to $84.1 million from $81.1 million for the second quarter of 2018.

Net income for the second quarter of 2019 was $2.6 million, or $0.25 per share compared with $3.6 million, or $0.34 per share, for the second quarter of 2018.

Adjusted EBITDA1 for the second quarter of 2019 increased 3% to $11.5 million from $11.2 million for the second quarter of 2018.  Adjusted EBITDA for the second 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 $0.7 million.

Cash and cash equivalents at the end of the second quarter of 2019 were $12.0 million compared with $11.0 million at the end of the first quarter of 2019 and $11.2 million at the end of the second quarter of 2018.

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 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 June 30 6 months ended June 30
  2019
(unaudited)
2018
(unaudited)
2019
(unaudited)
2018
(unaudited)
Net income for the period 2,616   3,608 5,415   7,352
Depreciation of property and equipment 2,172     1,330 4,097   2,562
Amortization of intangible assets   2,565     2,326 4,605   4,657
Interest expense, net   1,314   951 2,286   1,847
Provision for income taxes 1,819     1,228 3,076   2,411
Stock-based compensation 685   615 1,210   1,193
Unrealized loss (gain) on change in fair value of forward contracts (70 ) 46 (188 ) 43
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities (162 ) 282 (490 ) 459
Acquisition and transition costs* 547     802 906   1,043
         
Adjusted EBITDA   11,486     11,188 20,917   21,567
*Acquisition and other costs represents 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 commentary 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, August 13), 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, August 20 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 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)  
         
  June 30,   December 31,  
   2019
  2018 *  
  (unaudited)   (unaudited)  
         
Assets        
         
Current assets:        
Cash and cash equivalents $   12,003     $   12,637    
Accounts receivable   11,588       10,837    
Inventory   3,259       3,775    
Prepaid expenses and deposits   19,455       15,472    
Derivative instrument asset, current portion   140       -    
Prepaid domain name registry and ancillary services fees, current portion   97,788       87,782    
Other assets   2,501       -    
Income taxes recoverable   3,208       1,423    
Total current assets   149,942       131,926    
         
Prepaid domain name registry and ancillary services fees, long-term portion   18,060       18,745    
Property and equipment   64,010       48,065    
Right of use operating lease asset   11,395       -    
Contract costs   1,337       1,390    
Intangible assets   59,451       49,395    
Goodwill   110,093       90,054    
Total assets $   414,288     $   339,575    
         
         
Liabilities and Stockholders' Equity        
         
Current liabilities:        
Accounts payable $   7,590     $   8,445    
Accrued liabilities   10,789       5,899    
Customer deposits   13,526       11,919    
Derivative instrument liability   -       1,276    
Deferred rent, current portion   -       21    
Operating lease liability, current portion   1,496       -    
Loan payable, current portion   -       18,400    
Deferred revenue, current portion   130,499       116,734    
Accreditation fees payable, current portion   1,038       985    
Income taxes payable   797       1,668    
Total current liabilities   165,735       165,347    
         
Deferred revenue, long-term portion   26,720       26,960    
Accreditation fees payable, long-term portion   231       250    
Deferred rent, long-term portion   -       116    
Operating lease liability, long-term portion   9,482       -    
Loan payable, long-term portion   99,901       46,201    
Deferred Gain   -       -    
Deferred tax liability   25,218       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; 10,663,462 shares issued and outstanding as of June 30, 2019 and 10,627,988 shares issued and outstanding as of December 31, 2018   16,461       15,823    
Additional paid-in capital   4,195       3,953    
Retained earnings   66,225       60,810    
Accumulated other comprehensive income (loss)   120       (810 )  
Total stockholders' equity   87,001       79,776    
Total liabilities and stockholders' equity $   414,288     $   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 June 30,
  Six months ended June 30,
   2019    2018 *
   2019    2018 *
  (unaudited)   (unaudited)
                       
Net revenues $   84,117     $   81,087     $   163,070     $   176,882  
                       
Cost of revenues:                      
Cost of revenues     54,873         54,501         106,805         123,473  
Network expenses (*)     2,385         2,701         4,780         5,275  
Depreciation of property and equipment     2,038         1,228         3,839         2,359  
Amortization of intangible assets     314         499         488         998  
Total cost of revenues   59,610       58,929       115,912       132,105  
                       
Gross profit   24,507       22,158       47,158       44,777  
                       
Expenses:                      
Sales and marketing (*)     8,856         7,852         17,597         16,217  
Technical operations and development (*)     2,752         2,355         5,275         4,450  
General and administrative (*)     4,796         4,256         9,244         8,786  
Depreciation of property and equipment     134         102         258         203  
Amortization of intangible assets     2,251         1,827         4,117         3,659  
Loss (gain) on currency forward contracts     (31 )       52         (110 )       49  
Total expenses   18,758       16,444       36,381       33,364  
                       
Income from operations   5,749       5,714       10,777       11,413  
                       
Other income (expenses):                      
Interest expense, net   (1,314 )     (951 )     (2,286 )     (1,847 )
Other income, net   -       73       -       197  
Total other income (expenses)   (1,314 )     (878 )     (2,286 )     (1,650 )
                       
Income before provision for income taxes   4,435       4,836       8,491       9,763  
                       
Provision for income taxes   1,819       1,228       3,076       2,411  
Net income before redeemable non-controlling interest   2,616       3,608       5,415       7,352  
                       
Redeemable non-controlling interest   -         -        -         (26 )
                       
Net income attributable to redeemable non-controlling interest   -       -       -       26  
Net income for the period   2,616       3,608       5,415       7,352  
                       
Other comprehensive income, net of tax                      
Unrealized income (loss) on hedging activities   240       (273 )     789       (256 )
Net amount reclassified to earnings   80       13       141       13  
Other comprehensive income (loss) net of tax (expense) recovery of ($103) and $84 for the three months ended June 30, 2019 and June 30, 2018, ($298) and $78 for the six months ended June 30, 2019 and June 30, 2018   320       (260 )     930       (243 )
                       
Comprehensive income, net of tax for the period  $ 2,936      $ 3,348      $ 6,345      $ 7,109  
                       
Basic earnings per common share $ 0.25     $ 0.34     $ 0.51     $ 0.69  
                       
Shares used in computing basic earnings per common share   10,657,124       10,597,228       10,646,045       10,592,994  
                       
Diluted earnings per common share $ 0.24     $ 0.33     $ 0.50     $ 0.68  
                       
Shares used in computing diluted earnings per common share   10,840,005       10,803,007       10,837,456       10,797,017  
                       
                       
                       
(*) Stock-based compensation has been included in expenses as follows:                      
Network expenses $ 72     $ 28     $ 129     $ 84  
Sales and marketing $ 297     $ 245     $ 494     $ 432  
Technical operations and development $ 132     $ 174     $ 249     $ 351  
General and administrative $ 183     $ 168     $ 338     $ 327  
                       
*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 Cash Flows
(Dollar amounts in thousands of U.S. dollars)
                       
  Three months ended June 30,
  Six months ended June 30,
   2019    2018 *
   2019    2018 *
               
Cash provided by: (unaudited)   (unaudited)
Operating activities:                      
Net income for the period   $ 2,616     $ 3,608      $ 5,415     $ 7,352  
Items not involving cash:                      
Depreciation of property and equipment   2,172       1,330       4,097       2,562  
Loss on write off of property and equipment   -       -       22       -  
Amortization of debt discount and issuance costs   90       69       168       139  
Amortization of intangible assets   2,565       2,326       4,605       4,657  
Net amortization contract costs   34       25       53       50  
Deferred income taxes (recovery)   1,449       (445 )     1,911       (492 )
Excess tax benefits on share-based compensation expense   (381 )     (197 )     (737 )     (341 )
Amortization of deferred rent   -       (4 )     -       (4 )
Net Right of use operating assets/Operating lease liability   79       -       49       -  
Loss on disposal of domain names   2       28       6       65  
Other income   -       (42 )     -       (171 )
Loss (gain) on change in the fair value of forward contracts   (70 )     46       (188 )     43  
Stock-based compensation   685       615       1,210       1,193  
Change in non-cash operating working capital:                      
Accounts receivable   1,031       471       (157 )     162  
Inventory   108       (350 )     516       (304 )
Prepaid expenses and deposits   (2,524 )     (717 )     (2,914 )     (1,242 )
Prepaid domain name registry and ancillary services fees   1,651       204       (65 )     11,548  
Income taxes recoverable   (1,639 )     165       (2,875 )     430  
Accounts payable   (1,170 )     (1,862 )     (384 )     270  
Accrued liabilities   2,266       (401 )     3,587       358  
Customer deposits   (808 )     (46 )     (521 )     (2,321 )
Deferred revenue   (1,131 )     1,067       2,138       (8,531 )
Accreditation fees payable   (46 )     (136 )     34       (96 )
Net cash provided by operating activities   6,979       5,754       15,970       15,327  
                       
Financing activities:                      
Proceeds received on exercise of stock options   122       32       194       39  
Payment of tax obligations resulting from net exercise of stock options   (185 )     (141 )     (524 )     (288 )
Proceeds received on loan payable   7,431       2,500       40,371       2,500  
Repayment of loan payable   (3 )     (6,253 )     (4,603 )     (10,825 )
Payment of loan payable costs   (434 )     -       (641 )     (4 )
Net cash (used in) provided by financing activities   6,931       (3,862 )     34,797       (8,578 )
                       
Investing activities:                      
Additions to property and equipment   (10,414 )     (7,319 )     (20,849 )     (12,436 )
Acquisition of a portion of the minority interest in Ting Virginia, LLC   -       -       -       (1,200 )
Acquisition of other assets   (2,501 )     -       (2,501 )     -  
Acquisition of Ascio Technologies Inc. (net of cash of $1,437)   -       -       (28,024 )     -  
Acquisition of intangible assets   (27 )     -       (27 )     (1 )
Net cash used in investing activities   (12,942 )     (7,319 )     (51,401 )     (13,637 )
                       
(Decrease) increase in cash and cash equivalents   968       (5,427 )     (634 )     (6,888 )
                       
Cash and cash equivalents, beginning of period   11,035       16,588       12,637       18,049  
Cash and cash equivalents, end of period $ 12,003     $ 11,161     $ 12,003     $ 11,161  
                       
Supplemental cash flow information:                      
Interest paid $ 1,318      $ 961     $ 2,294      $ 1,862  
Income taxes paid, net $ 2,046      $ 2,240     $ 4,164      $ 3,577  
                       
Supplementary disclosure of non-cash investing and financing activities:                      
Property and equipment acquired during the period not yet paid for $ 674     $ 258     $ 674     $ 258  
                       
*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 U.S. Dollars)  
(unaudited)  
                       
                       
   Three months ended June 30,
  Six months ended June 30,
   2019
(unaudited)

  2018
(unaudited)
  2019
(unaudited)

  2018
(unaudited)
                        
Net income for the period $   2,616     $ 3,608   $ 5,415     $ 7,352
Depreciation of property and equipment     2,172       1,330       4,097       2,562
Amortization of intangible assets     2,565       2,326       4,605       4,657
Interest expense, net     1,314       951       2,286       1,847
Provision for income taxes     1,819       1,228       3,076       2,411
Stock-based compensation     685       615       1,210       1,193
Unrealized loss (gain) on change in fair value of forward contracts     (70 )     46       (188 )     43
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities     (162 )     282       (490 )     459
Acquisition and other costs1     547       802       906       1,043
                       
Adjusted EBITDA $   11,486     $ 11,188   $   20,917     $ 21,567
                       
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