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Tucows Reports Financial Results for Second Quarter 2020

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Tucows Inc.
·19 min read
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TORONTO, Aug. 06, 2020 (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, 2020. All figures are in U.S. dollars.

COVID-19: Tucows shareholders and prospective investors are encouraged to read Tucows’ public statement regarding COVID-19, which is available here: https://bit.ly/2LavpOc.


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

3 Months ended June 30

6 Months ended June 30

2020
(Un-
audited)

2019
(Un-
audited)

% Change

2020
(Un-
audited)

2019
(Un-
audited)

% Change

Net revenue

82,122

84,117

(2.4

%)

166,107

163,070

1.9

%

Gross Profit

22,966

24,507

(6.3

%)

48,116

47,158

2.0

%

Net income1

157

2,616

(94.0

%)

2,991

5,415

(44.8

%)

Basic Net earnings per common share

0.01

0.25

(96.0

%)

0.28

0.51

(45.1

%)

Adjusted EBITDA2

12,175

11,486

6.0

%

24,856

20,917

18.8

%

Net cash provided by operating activities

8,939

6,979

28.1

%

23,012

15,970

44.1

%


1.

Net income for the second quarter of 2020 included two non-cash, non-recurring charges for asset impairments totalling $2.3 million, or $0.22 per share. Excluding these two items, net income would have been $2.5 million, or $0.23 per share.

2.

This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.

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

Revenue

Gross Profit

3 Months ended
June 30

3 Months ended
June 30

2020
(Unaudited)

2019
(Unaudited)

2020
(Unaudited)

2019
(Unaudited)

Network Access Services:

Mobile Services

17,567

20,986

8,907

10,180

Other Services

4,414

2,644

2,749

1,688

Total Network Access Services

21,981

23,630

11,656

11,868

Domain Services:

Wholesale

Domain Services

46,206

46,485

9,852

8,668

Value Added Services

5,034

4,775

4,272

4,037

Total Wholesale

51,240

51,260

14,124

12,705

Retail

8,567

8,783

4,348

4,374

Portfolio3

334

444

204

297

Total Domain Services

60,141

60,487

18,676

17,376

Network Expenses:

Network, other costs

-

-

(2,485

)

(2,385

)

Network, depreciation and amortization costs

-

-

(3,356

)

(2,352

)

Network, impairment

(1,525

)

-

Total Network expenses

-

-

(7,366

)

(4,737

)

Total

82,122

84,117

22,966

24,507


3.

Beginning in the first quarter of 2020, portfolio revenue consisted of individual sales from Tucows’ surname portfolio following the sale of the Company’s remaining domain name portfolio in the fourth quarter of 2019.

“The second quarter was once again demonstrative of the consistency and cash generating ability of the Tucows business,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Our Domains business had another solid quarter, as we benefited from significantly higher transaction activity as micro- and small-sized businesses and start-ups acted quickly to establish a web presence for the first time amid the pandemic, in addition to our continued success focusing on the quality of our customer base for gross margin contribution. Although a somewhat challenging quarter for our Ting Mobile business, our recently announced transition to our new Mobile Services Enabler model, with DISH as our first customer, provides a much-improved near- and long-term outlook for this business, and strong visibility around cash flows, particularly amidst a rapidly changing industry dynamic. Finally, Ting Internet saw another quarter of steady progress across all facets of that business, meaningfully adding passed addresses, serviceable addresses and new customers, as we achieved a record quarter for capital expenditure on our network.”

Financial Results

Net revenue for the second quarter of 2020 was $82.1 million, a decrease of 2.4% from $84.1 million for the second quarter of 2019. Gross profit for the second quarter of 2020 was $23.0 million, a decrease of 6.3% from $24.5 million for the second quarter of 2019. The decreases in net revenue and gross margin were the result of decreases for each in the Ting Mobile business, with gross margin additionally impacted by a non-recurring asset impairment charge related to a change in strategy for the Ting Internet TV product. Excluding the impact of the asset impairment, gross margin for the second quarter of 2020 would have increased 4.0% compared to the second quarter of 2019.

Net income for the second quarter of 2020 was $0.2 million, or $0.01 per share, compared with $2.6 million, or $0.25 per share, and included two non-cash, non-recurring charges for asset impairments totalling on an after-tax basis $2.3 million ($1.3 million related to the wind up of the Ting Mobile ROAM Mobility business and $1.0 million related to the aforementioned change in strategy for the Ting Internet TV product), or $0.22 per share. Excluding these two items, net income would have been $2.5 million, or $0.23 per share. This compares with net income for the second quarter of 2019 of $2.6 million, or $0.25 per share.

Adjusted EBITDA1 for the second quarter of 2020 increased 6% to $12.2 million from $11.5 million for the second quarter of 2019.

Cash and cash equivalents at the end of the second quarter of 2020 was $8.9 million compared with $12.4 million at the end of the first quarter of 2020 and $12.0 million at the end of the second quarter of 2019.

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 (net), accretion of contingent consideration, 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

2020 (unaudited)

2019 (unaudited)

2020 (unaudited)

2019 (unaudited)

Net income for the period

157

2,616

2,991

5,415

Depreciation of property and equipment

3,155

2,172

6,145

4,097

Impairment of property and equipment

1,525

-

1,525

-

Amortization of intangible assets

2,830

2,565

6,131

4,605

Impairment of definite life intangible assets

1,431

-

1,431

-

Interest expense, net

846

1,314

1,996

2,286

Accretion of contingent consideration

85

-

172

-

Provision for income taxes

449

1,819

1,550

3,076

Stock-based compensation

847

685

1,648

1,210

Unrealized loss (gain) on change in fair value of forward contracts

(436

)

(70

)

(88

)

(188

)

Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities

441

(162

)

399

(490

)

Acquisition and transition costs*

845

547

956

906

Adjusted EBITDA

12,175

11,486

24,856

20,917

*Acquisition and other costs represent transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to the Company’s acquisition of Ascio in March 2019, Cedar in January 2020, the shut-down of Roam Mobility in June of 2020 and the costs associated with various DISH agreements executed in August of 2020. 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 Wednesday, August 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 Monday, August 17 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, mobile technology services, domain names and other Internet services. Ting Internet (https://ting.com/internet) delivers fixed fiber Internet access with outstanding customer support. Tucows’ mobile services enabler (MSE) platform provides network access, provisioning and billing services for mobile virtual network operators (MVNOs). OpenSRS (https://opensrs.com), Enom (https://www.enom.com) and Ascio (https://ascio.com) combined manage approximately 25 million domain names and millions of value-added services through a global reseller network of over 36,000 web hosts and ISPs. Hover (https://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 (https://tucows.com).

Tucows Inc.

June 30,

December 31,

Consolidated Balance Sheets

2020

2019

(Dollar amounts in thousands of U.S. dollars)

(unaudited)

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

8,859

$

20,393

Accounts receivable

7,506

14,564

Inventory

965

3,457

Prepaid expenses and deposits

16,549

13,478

Derivative instrument asset, current portion

1,080

731

Prepaid domain name registry and ancillary services fees, current portion

96,322

91,252

Assets held-for-sale

9,027

-

Income taxes recoverable

1,326

1,800

Total current assets

141,634

145,675

Derivative instrument asset, long-term portion

611

-

Prepaid domain name registry and ancillary services fees, long-term portion

17,902

17,915

Property and equipment

101,292

82,121

Right of use operating lease asset

11,066

11,335

Contract costs

344

1,400

Deferred tax asset

340

-

Intangible assets

52,732

57,654

Goodwill

116,270

109,818

Total assets

$

442,191

$

425,918

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

6,511

$

6,671

Accrued liabilities

9,915

9,373

Customer deposits

14,468

14,074

Derivative instrument liability

561

-

Liabilities held-for-sale

751

-

Operating lease liability, current portion

1,506

1,413

Deferred revenue, current portion

129,072

123,101

Accreditation fees payable, current portion

1,018

952

Income taxes payable

1,291

1,324

Total current liabilities

165,093

156,908

Derivative instrument liability

158

-

Deferred revenue, long-term portion

26,228

26,202

Accreditation fees payable, long-term portion

204

216

Operating lease liability, long-term portion

9,169

9,424

Loan payable, long-term portion

113,608

113,503

Other long-term liability

3,244

-

Deferred tax liability

27,113

25,471

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; 10,570,360 shares issued and outstanding as of June 30, 2020 and 10,585,159 shares issued and outstanding as of December 31, 2019

18,865

16,633

Additional paid-in capital

591

880

Retained earnings

77,322

76,208

Accumulated other comprehensive income (loss)

596

473

Total stockholders' equity

97,374

94,194

Total liabilities and stockholders' equity

$

442,191

$

425,918



Tucows Inc.

Three months ended June 30,

Six months ended June 30,

Consolidated Statements of Operations and Comprehensive Income

2020

2019

2020

2019

(Dollar amounts in thousands of U.S. dollares)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Net revenues

$

82,122

$

84,117

$

166,107

$

163,070

Cost of revenues:

Cost of revenues

51,790

54,873

104,978

106,805

Network expenses (*)

2,485

2,385

4,901

4,780

Depreciation of property and equipment

3,030

2,038

5,907

3,839

Amortization of intangible assets

326

314

680

488

Impairment of property and equipment

1,525

-

1,525

-

Total cost of revenues

59,156

59,610

117,991

115,912

Gross profit

22,966

24,507

48,116

47,158

Expenses:

Sales and marketing (*)

9,218

8,856

18,203

17,597

Technical operations and development (*)

3,067

2,752

5,818

5,275

General and administrative (*)

5,465

4,796

10,206

9,244

Depreciation of property and equipment

125

134

238

258

Amortization of intangible assets

2,504

2,251

5,451

4,117

Impairment of definite life intangible assets

1,431

-

1,431

-

Loss (gain) on currency forward contracts

(381

)

(31

)

60

(110

)

Total expenses

21,429

18,758

41,407

36,381

Income from operations

1,537

5,749

6,709

10,777

Other income (expenses):

Interest expense, net

(846

)

(1,314

)

(1,996

)

(2,286

)

Other expense, net

(85

)

-

(172

)

-

Total other income (expenses)

(931

)

(1,314

)

(2,168

)

(2,286

)

Income before provision for income taxes

606

4,435

4,541

8,491

Provision for income taxes

449

1,819

1,550

3,076

Net income for the period

157

2,616

2,991

5,415

Other comprehensive income, net of tax

Unrealized income (loss) on hedging activities

1,114

240

(120

)

789

Net amount reclassified to earnings

200

80

243

141

Other comprehensive income (loss) net of tax (expense) recovery of $398 and $103 for the three months ended June 30, 2020 and June 30, 2019 and $32 and $298 for the six months ended June 30, 2020 and June 30, 2019

1,314

320

123

930

Comprehensive income, net of tax for the period

$

1,471

$

2,936

$

3,114

$

6,345

Basic earnings per common share

$

0.01

$

0.25

$

0.28

$

0.51

Shares used in computing basic earnings per common share

10,567,382

10,657,124

10,589,806

10,646,045

Diluted earnings per common share

$

0.01

$

0.24

$

0.28

$

0.50

Shares used in computing diluted earnings per common share

10,653,527

10,840,005

10,684,304

10,837,456

(*) Stock-based compensation has been included in expenses as follows:

Network expenses

$

109

$

72

$

196

$

129

Sales and marketing

$

375

$

297

$

745

$

494

Technical operations and development

$

184

$

132

$

351

$

249

General and administrative

$

179

$

183

$

356

$

338



Tucows Inc.

Three months ended June 30,

Six months ended June 30,

Consolidated Statements of Cash Flows

2020

2019

2020

2019

(Dollar amounts in thousands of U.S. dollars)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Cash provided by:

Operating activities:

Net income for the period

$

157

$

2,616

$

2,991

$

5,415

Items not involving cash:

Depreciation of property and equipment

3,155

2,172

6,145

4,097

Loss on write off/impairment of property and equipment

1,525

-

1,525

22

Amortization of debt discount and issuance costs

67

90

134

168

Amortization of intangible assets

2,830

2,565

6,131

4,605

Net amortization contract costs

95

34

124

53

Accretion of contingent consideration

85

-

172

-

Impairment of definite life intangible asset

1,431

-

1,431

-

Other

223

-

223

-

Deferred income taxes (recovery)

(917

)

1,449

(1,107

)

1,911

Excess tax benefits on share-based compensation expense

(164

)

(381

)

(344

)

(737

)

Net Right of use operating assets/Operating lease liability

291

79

112

49

Loss on disposal of domain names

2

2

15

6

Loss (gain) on change in the fair value of forward contracts

(436

)

(70

)

(88

)

(188

)

Stock-based compensation

847

685

1,648

1,210

Change in non-cash operating working capital:

Accounts receivable

401

1,031

2,552

(157

)

Inventory

900

108

1,804

516

Prepaid expenses and deposits

(3,247

)

(2,524

)

(3,222

)

(2,914

)

Prepaid domain name registry and ancillary services fees

(2,204

)

1,651

(5,057

)

(65

)

Income taxes recoverable

294

(1,639

)

794

(2,875

)

Accounts payable

(1,521

)

(1,170

)

250

(384

)

Accrued liabilities

2,165

2,266

334

3,587

Customer deposits

336

(808

)

394

(521

)

Deferred revenue

2,655

(1,131

)

5,997

2,138

Accreditation fees payable

(31

)

(46

)

54

34

Net cash provided by operating activities

8,939

6,979

23,012

15,970

Financing activities:

Proceeds received on exercise of stock options

29

122

46

194

Payment of tax obligations resulting from net exercise of stock options

(165

)

(185

)

(347

)

(524

)

Repurchase of common stock

(164

)

-

(3,281

)

-

Proceeds received on loan payable

-

7,431

-

40,371

Repayment of loan payable

-

(3

)

-

(4,603

)

Payment of loan payable costs

(7

)

(434

)

(32

)

(641

)

Net cash (used in) provided by financing activities

(307

)

6,931

(3,614

)

34,797

Investing activities:

Additions to property and equipment

(12,150

)

(10,414

)

(22,093

)

(20,849

)

Acquisition of other assets

-

(2,501

)

-

(2,501

)

Acquisition of Cedar Holdings Group (net of cash of $66)

-

-

(8,770

)

-

Acquisition of Ascio Technologies (net of cash of $1)

-

-

-

(28,024

)

Acquisition of intangible assets

(69

)

(27

)

(69

)

(27

)

Net cash used in investing activities

(12,219

)

(12,942

)

(30,932

)

(51,401

)

(Decrease) increase in cash and cash equivalents

(3,587

)

968

(11,534

)

(634

)

Cash and cash equivalents, beginning of period

12,446

11,035

20,393

12,637

Cash and cash equivalents, end of period

$

8,859

$

12,003

$

8,859

$

12,003

Supplemental cash flow information:

Interest paid

$

686

$

1,318

$

1,840

$

2,294

Income taxes paid, net

$

1,243

$

2,046

$

2,200

$

4,164

Supplementary disclosure of non-cash investing and financing activities:

Property and equipment acquired during the period not yet paid for

$

635

$

674

$

635

$

674

Fair value of shares issued for acquisition of Cedar Holdings Group

$

-

$

-

$

2,000

$

-

Fair value of contingent consideration for acquisition of Cedar Holdings Group

$

7

$

-

$

3,072

$

-



Tucows Inc.

Three months ended June 30,

Six months ended June 30,

Reconciliation of Net income to Adjusted EBITDA

2020

2019

2020

2019

(Dollar amounts in thousands of U.S. dollars)

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Net income for the period

$

157

$

2,616

$

2,991

$

5,415

Depreciation of property and equipment

3,155

2,172

6,145

4,097

Loss on write off/impairment of property and equipment

1,525

-

1,525

-

Amortization of intangible assets

2,830

2,565

6,131

4,605

Impairment of definite life intangible asset

1,431

-

1,431

-

Interest expense, net

846

1,314

1,996

2,286

Accretion of contingent consideration

85

-

172

-

Provision for income taxes

449

1,819

1,550

3,076

Stock-based compensation

847

685

1,648

1,210

Unrealized loss (gain) on change in fair value of forward contracts

(436

)

(70

)

(88

)

(188

)

Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities

441

(162

)

399

(490

)

Acquisition and other costs1

845

547

956

906

Adjusted EBITDA

$

12,175

$

11,486

$

24,856

$

20,917

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, Ascio in March 2019, Cedar in January 2020 and the costs associated with various DISH agreements executed in August of 2020. 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
(416) 519-4196 | lawrence.chamberlain@loderockadvisors.com