U.S. Markets open in 10 mins

Tucows Reports Financial Results for Third Quarter 2019

TORONTO, Nov. 06, 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 third quarter ended September 30, 2019. All figures are in U.S. dollars.

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

  3 Months Ended September 30 9 Months Ended September 30
2019
(Unaudited)
2018
(Unaudited)
%
Change
2019
(Unaudited)
2018
(Unaudited)
%
Change
Net revenue 88,129 83,519 6% 251,199 260,401 -4%
Net income 4,205 5,346 -21% 9,620 12,699 -24%
Basic Net earnings per common share 0.40 0.50 -20% 0.90 1.20   -25%
Adjusted EBITDA1,2 14,832 11,858 25% 35,749 33,425 7%
Net cash provided by operating activities 11,215 11,214 0% 27,185 26,541 2%
  1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
  2. Adjusted EBITDA for the three and first nine 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 $0.9 million and $1.9 million, respectively.


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

  Revenue Gross Profit
  3 Months ended September 30  3 Months ended September 30
  2019
(Unaudited)
2018
(Unaudited)
2019
(Unaudited)
2018
(Unaudited)
Network Access Services:
Mobile Services 21,722 22,546 10,551 11,147
Other Services 2,890 2,033 1,954 1,161
Total Network Access Services 24,612 24,579 12,505 12,308
Domain Services:
Wholesale        
Domain Services 47,259 45,071 8,922 7,657
Value Added Services 5,154 4,540 4,381 3,733
Total Wholesale 52,413 49,611 13,303 11,390
         
Retail 8,713 8,731 4,354 4,266
Portfolio 2,391 598 2,211 450
Total Domain Services 63,517 58,940 19,868 16,106
Network Expenses:
Network, other costs - - (2,254) (2,315)
Network, depreciation and amortization costs - - (2,545) (1,838)
Total Network expenses - - (4,799) (4,153)
         
Total 88,129 83,519 27,574 24,261

“The third quarter was highlighted by solid financial performance, with year-over-year growth in revenue, gross margin and adjusted EBITDA, as we continued to execute on our strategic priorities in each component of the business,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Our Domains and Ting Mobile businesses continue to generate strong cash flows to support our outsized Ting Internet growth opportunity, where we saw another quarter of steady progress -- further expanding both our projected potential serviceable addresses and serviceable addresses completed, while continuing to add new customers.”

Financial Results

Net revenue for the third quarter of 2019 increased 6% to $88.1 million from $83.5 million for the third quarter of 2018.

Net income for the third quarter of 2019 decreased 21% to $4.2 million, or $0.40 per share from $5.3 million, or $0.50 per share, for the third quarter of 2018.

Adjusted EBITDA1 for the third quarter of 2019 increased 25% to $14.8 million from $11.8 million for the third quarter of 2018. Adjusted EBITDA for the third 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, which lowered Adjusted EBITDA by $0.9 million.

Cash and cash equivalents at the end of the third quarter of 2019 were $12.0 million compared with $12.0 million at the end of the second quarter of 2019 and $10.8 million at the end of the third 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
September 30
9 months ended
September 30
  2019
(unaudited)
2018
(unaudited)
2019
(unaudited)
2018
(unaudited)
Net income for the period 4,205 5,346 9,620 12,699
Depreciation of property and equipment 2,348 1,445 6,445 4,006
Loss on disposition of property and equipment 73 - 73 -
Amortization of intangible assets 2,858 2,296 7,463 6,953
Interest expense, net 1,263 914 3,549 2,761
Provision for income taxes 3,133 1,370 6,209 3,781
Stock-based compensation 830 711 2,040 1,904
Unrealized loss (gain) on change in fair value of forward contracts (16) (35) (204) 7
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities 88 (269) (402) 191
Acquisition and transition costs* 50 80 956 1,123
         
Adjusted EBITDA 14,832 11,858 35,749 33,425
*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, November 12), shareholders, analysts and prospective investors can submit questions to Tucows’ management at ir@tucows.com. Management will post responses to questions of general interest to the Company’s web site at http://www.tucows.com/investors/financials/ on Thursday, November 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) combined manage approximately 24 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)  
           
    September 30, December 31,  
     2019    2018 *  
    (unaudited)   (unaudited)  
           
Assets          
           
Current assets:          
Cash and cash equivalents   $ 11,989     $ 12,637    
Accounts receivable     13,351       10,837    
Inventory     3,903       3,775    
Prepaid expenses and deposits     19,717       15,472    
Derivative instrument asset, current portion     -       -    
Prepaid domain name registry and ancillary services fees, current portion     95,614       87,782    
Other assets     -       -    
Income taxes recoverable     2,532       1,423    
Total current assets     147,106       131,926    
           
Prepaid domain name registry and ancillary services fees, long-term portion     17,477       18,745    
Property and equipment     72,167       48,065    
Right of use operating lease asset     11,028       -    
Contract costs     1,398       1,390    
Intangible assets     60,066       49,395    
Goodwill     110,100       90,054    
Total assets   $ 419,342     $ 339,575    
           
           
Liabilities and Stockholders' Equity          
           
Current liabilities:          
Accounts payable   $ 5,440     $ 8,445    
Accrued liabilities     14,445       5,899    
Customer deposits     14,920       11,919    
Derivative instrument liability     41       1,276    
Deferred rent, current portion     -       21    
Operating lease liability, current portion     1,450       -    
Loan payable, current portion     -       18,400    
Deferred revenue, current portion     128,138       116,734    
Accreditation fees payable, current portion     977       985    
Income taxes payable     689       1,668    
Total current liabilities     166,100       165,347    
           
Deferred revenue, long-term portion     26,003       26,960    
Accreditation fees payable, long-term portion     224       250    
Deferred rent, long-term portion     -       116    
Operating lease liability, long-term portion     9,107       -    
Loan payable, long-term portion     104,968       46,201    
Deferred Gain     -       -    
Deferred tax liability     25,941       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; 10,572,069 shares issued and outstanding as of September 30, 2019 and 10,627,988 shares issued and outstanding as of December 31, 2018     16,492       15,823    
Additional paid-in capital     106       3,953    
Retained earnings     70,430       60,810    
Accumulated other comprehensive income (loss)     (29 )     (810 )  
Total stockholders' equity     86,999       79,776    
Total liabilities and stockholders' equity   $ 419,342     $ 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 September 30,   Nine months ended September 30,
    2019   2018 *   2019   2018 *
       
  (unaudited)   (unaudited)
                 
Net revenues $ 88,129   $ 83,519   $ 251,199   $ 260,401  
                 
Cost of revenues:                
Cost of revenues   55,756     55,105     162,561     178,578  
Network expenses (*)   2,254     2,315     7,034     7,590  
Depreciation of property and equipment   2,231     1,339     6,070     3,697  
Amortization of intangible assets   314     499     802     1,497  
Total cost of revenues   60,555     59,258     176,467     191,362  
                 
Gross profit   27,574     24,261     74,732     69,039  
                 
Expenses:                
Sales and marketing (*)   8,769     8,412     26,366     24,629  
Technical operations and development (*)   2,876     2,207     8,151     6,657  
General and administrative (*)   4,574     4,120     13,818     12,906  
Depreciation of property and equipment   117     106     375     309  
Loss on disposition of property and equipment   73     -     73     -  
Amortization of intangible assets   2,544     1,797     6,661     5,456  
Loss (gain) on currency forward contracts   20     (27 )   (90 )   22  
Total expenses   18,973     16,615     55,354     49,979  
                 
Income from operations   8,601     7,646     19,378     19,060  
                 
Other income (expenses):                
Interest expense, net   (1,263 )   (914 )   (3,549 )   (2,761 )
Other income, net   -     (16 )   -     181  
Total other income (expenses)   (1,263 )   (930 )   (3,549 )   (2,580 )
                 
Income before provision for income taxes   7,338     6,716     15,829     16,480  
                 
Provision for income taxes   3,133     1,370     6,209     3,781  
Net income before redeemable non-controlling interest   4,205     5,346     9,620     12,699  
                 
Redeemable non-controlling interest   -     -     -     (26 )
                 
Net income attributable to redeemable non-controlling interest -     -     -     26  
Net income for the period   4,205     5,346     9,620     12,699  
                 
Other comprehensive income, net of tax                
Unrealized income (loss) on hedging activities   (175 )   144     614     (112 )
Net amount reclassified to earnings   26     63     167     76  
Other comprehensive income (loss) net of tax (expense) recovery of $47 and ($59) for the three months ended September 30, 2019 and September 30, 2018, ($250) and $19 for the nine months ended September 30, 2019 and September 30, 2018 (note 5)   (149 )   207     781     (36 )
                 
Comprehensive income, net of tax for the period $ 4,056   $ 5,553   $ 10,401   $ 12,663  
                 
Basic earnings per common share $ 0.40   $ 0.50   $ 0.90   $ 1.20  
                 
Shares used in computing basic earnings per common share   10,626,754     10,611,579     10,639,544     10,599,243  
                 
Diluted earnings per common share $ 0.39   $ 0.50   $ 0.89   $ 1.18  
                 
Shares used in computing diluted earnings per common share   10,745,834     10,794,297     10,798,099     10,795,668  
                 
                 
                 
(*) Stock-based compensation has been included in expenses as follows:                
Network expenses $ 95   $ 70   $ 224   $ 153  
Sales and marketing $ 363   $ 307   $ 857   $ 739  
Technical operations and development $ 179   $ 150   $ 428   $ 501  
General and administrative $ 193   $ 184   $ 531   $ 511  
                 
*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 September 30,     Nine months ended September 30, 
    2019    2018 *   2019    2018 *
         
         
         
Cash provided by:   (unaudited)
  (unaudited) 
Operating activities:                
Net income for the period $ 4,205   $ 5,346   $ 9,620   $ 12,699  
Items not involving cash:                
Depreciation of property and equipment   2,348     1,445     6,445     4,006  
Loss on write off of property and equipment   120     -     142     -  
Amortization of debt discount and issuance costs   64     72     232     211  
Amortization of intangible assets   2,858     2,296     7,463     6,953  
Net amortization contract costs   (61 )   (29 )   (8 )   21  
Deferred income taxes (recovery)   (170 )   (369 )   1,741     (861 )
Excess tax benefits on share-based compensation expense   (53 )   (191 )   (790 )   (532 )
Amortization of deferred rent   -     (5 )   -     (9 )
Net Right of use operating assets/Operating lease liability   (54 )   -     (5 )   -  
Loss on disposal of domain names   66     5     72     70  
Other income   -     -     -     (171 )
Loss (gain) on change in the fair value of forward contracts   (16 )   (30 )   (204 )   13  
Stock-based compensation   830     711     2,040     1,904  
Change in non-cash operating working capital:                
Accounts receivable   (1,763 )   685     (1,920 )   847  
Inventory   (644 )   108     (128 )   (196 )
Prepaid expenses and deposits   (329 )   874     (3,243 )   (368 )
Prepaid domain name registry and ancillary services fees   3,819     4,229     3,754     15,777  
Income taxes recoverable   1,576     (137 )   (1,299 )   293  
Accounts payable   (2,394 )   778     (2,778 )   1,048  
Accrued liabilities   3,687     107     7,274     465  
Customer deposits   1,394     (1,049 )   873     (3,370 )
Deferred revenue   (4,200 )   (3,559 )   (2,062 )   (12,090 )
Accreditation fees payable   (68 )   (73 )   (34 )   (169 )
Net cash provided by operating activities   11,215     11,214     27,185     26,541  
                 
Financing activities:                
Proceeds received on exercise of stock options   118     23     312     62  
Payment of tax obligations resulting from net exercise of stock options   (20 )   (116 )   (544 )   (404 )
Repurchase of common stock   (4,986 )   -     (4,986 )   -  
Proceeds received on loan payable   5,000     -     45,371     2,500  
Repayment of loan payable   3     (4,387 )   (4,600 )   (15,212 )
Payment of loan payable costs   2     (4 )   (639 )   (8 )
Net cash (used in) provided by financing activities   117     (4,484 )   34,914     (13,062 )
                 
Investing activities:                
Additions to property and equipment   (10,308 )   (7,003 )   (31,157 )   (19,439 )
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   (1,038 )   (113 )   (3,566 )   (114 )
Net cash used in investing activities   (11,346 )   (7,116 )   (62,747 )   (20,753 )
                 
(Decrease) increase in cash and cash equivalents   (14 )   (386 )   (648 )   (7,274 )
                 
Cash and cash equivalents, beginning of period   12,003     11,161     12,637     18,049  
Cash and cash equivalents, end of period $ 11,989   $ 10,775   $ 11,989   $ 10,775  
                 
Supplemental cash flow information:                
Interest paid $ 1,267   $ 919   $ 3,561   $ 2,781  
Income taxes paid, net $ 1,959   $ 1,793   $ 6,123   $ 5,370  
                 
Supplementary disclosure of non-cash investing and financing activities:                
Property and equipment acquired during the period not yet paid for $ 991   $ 382   $ 991   $ 382  
Acquisition of intangible assets transferred from other assets $ 2,501   $ -   $ -   $ -  
                 
*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)   Three months ended September 30,   Nine months ended September 30,  
(unaudited)   2019
(unaudited)
  2018
(unaudited)
  2019
(unaudited)
  2018
(unaudited)
 
                   
Net income for the period $ 4,205   $ 5,346   $ 9,620   $ 12,699  
Depreciation of property and equipment   2,348     1,445     6,445     4,006  
Loss on disposition of property and equipment   73     -     73     -  
Amortization of intangible assets   2,858     2,296     7,463     6,953  
Interest expense, net   1,263     914     3,549     2,761  
Provision for income taxes   3,133     1,370     6,209     3,781  
Stock-based compensation   830     711     2,040     1,904  
Unrealized loss (gain) on change in fair value of forward contracts   (16 )   (35 )   (204 )   7  
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities   88     (269 )   (402 )   191  
Acquisition and other costs1   50     80     956     1,123  
                   
Adjusted EBITDA $ 14,832   $ 11,858   $ 35,749   $ 33,425  
                   
1 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 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
(416) 519-4196 | lawrence.chamberlain@loderockadvisors.com