Tucows Reports Financial Results for Third Quarter 2019

| Source: Tucows Inc. Tucows Inc.

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 309 Months Ended September 30
2019
(Unaudited)		2018
(Unaudited)		%
Change		2019
(Unaudited)		2018
(Unaudited)		%
Change
Net revenue88,12983,5196%251,199260,401-4%
Net income4,2055,346-21%9,62012,699-24%
Basic Net earnings per common share0.400.50-20%0.901.20  -25%
Adjusted EBITDA1,214,83211,85825%35,74933,4257%
Net cash provided by operating activities11,21511,2140%27,18526,5412%
  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)

 RevenueGross Profit
 3 Months ended September 30  3 Months ended September 30
 2019
(Unaudited)		2018
(Unaudited)		2019
(Unaudited)		2018
(Unaudited)
Network Access Services:
Mobile Services21,72222,54610,55111,147
Other Services2,8902,0331,9541,161
Total Network Access Services24,61224,57912,50512,308
Domain Services:
Wholesale    
Domain Services47,25945,0718,9227,657
Value Added Services5,1544,5404,3813,733
Total Wholesale52,41349,61113,30311,390
     
Retail8,7138,7314,3544,266
Portfolio2,3915982,211450
Total Domain Services63,51758,94019,86816,106
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)
     
Total88,12983,51927,57424,261

“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 4,2055,3469,62012,699
Depreciation of property and equipment2,3481,4456,4454,006
Loss on disposition of property and equipment73-73-
Amortization of intangible assets2,8582,2967,4636,953
Interest expense, net1,2639143,5492,761
Provision for income taxes3,1331,3706,2093,781
Stock-based compensation8307112,0401,904
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 liabilities88(269)(402)191
Acquisition and transition costs*50809561,123
     
Adjusted EBITDA14,83211,85835,74933,425
*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