Tucows Reports Continuing Strong Financial Results for First Quarter of 2017

TORONTO, May 09, 2017 (GLOBE NEWSWIRE) -- Tucows Inc. (NASDAQ:TCX) (TSX:TC), a provider of network access, domain names and other Internet services, today reported its financial results for the first quarter ended March 31, 2017. All figures are in U.S. dollars.

Summary Financial Results
(In Thousands of US Dollars, Except Per Share Data)
 
  
 3 Months Ended March 31
 2017
(Unaudited)
2016
(Unaudited)
% Change
Net revenue69,56844,74655%
Net income2,4464,438-45%
Basic Net earnings per common share0.230.42-45%
Adjusted EBITDA16,1967,318-15%
Net cash provided by operating activities2,4025,615-57%
     
  1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table. Tucows has revised its definition of Adjusted EBITDA as detailed in the description below and the table reconciling Adjusted EBITDA to GAAP net income.
 
 
Summary of Revenues and Gross Margin
(In Thousands of US Dollars)
 
 RevenueGross Margin
 3 Months ended
March 31
3 Months ended
March 31
 2017
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
2016
(Unaudited)
Network Access Services:
Mobile Services17,96316,1078,396 7,549 
Other Services1,138891295 504 
Total Network Access Services19,10116,9988,691 8,053 
     
Domain Services:
Wholesale    
Domain Services39,09221,2584,629 3,615 
Value Added Services4,0572,2993,499 1,820 
Total Wholesale43,14923,5578,128 5,435 
     
Retail6,4023,4512,784 1,872 
Portfolio916740655 580 
Total Domain Services50,46727,74811,567 7,887 
     
Network Expenses:
Network, other costs--(2,343)(1,233)
Network, depreciation and amortization costs--(971)(358)
Total Network expenses--(3,314)(1,591)
     
Total revenue/gross margin69,56844,74616,944 14,349 

“During the first quarter of 2017 we successfully began integrating Enom into our domain business and we successfully migrated over 20,000 mobile customers to Ting from RingPlus. We also continued to deploy significant resources to develop our Ting Internet operations and to invest in building out our Ting Fiber network. With a solid quarter behind us, I am pleased to report that we remain on track to meet our adjusted EBITDA goal of $50 million less $8 million of acquisition related non-cash impacts for fiscal 2017,”2 said Elliot Noss, President and Chief Executive Officer, Tucows Inc.

“Revenue for first quarter grew 55% year-over year to $69.6 million.  Net deferred revenues increased in the first quarter of 2017 by $4.8 million primarily due to the Enom acquisition.  Prior to the second quarter of 2016, this amount would have been included in our then adjusted EBITDA definition.   Overall, we are delighted with how each of our businesses executed against core strategies. Domains took steps toward scale and efficiency, Ting Mobile grew and Ting Internet improved and invested in fiber network expansion, systems and people,” added Mr. Noss.  “With our sound financial position and our significant cash flows, we remain well positioned for sustainable growth and continued investment in our strategic priority, building fiber.”

Financial Results
  
Net revenue for the first quarter of 2017 increased 55% to $69.6 million from $44.7 million for the first quarter of 2016. The first quarter’s results only include the contribution from Enom’s operations since January 20, 2017, the date the acquisition was completed.

Net income for the first quarter of 2017 decreased to $2.4 million, or $0.23 per share, from $4.4 million, or $0.42 per share, for the first quarter of 2016. Adjusted EBITDA1 for the first quarter of 2017 decreased to $6.2 million from $7.3 million for the first quarter of 2016.  The first quarter of 2017 was impacted by the effect of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Enom acquisition which lowered adjusted EBITDA by $1.4 million and is a portion of the $4.8 million net deferred revenue change noted above.   The first quarter of 2016 benefited from $0.4 million reversal of an overachievement bonus accrual for 2015 that was no longer required and a foreign exchange gain of $0.4 million that was not repeated.

Cash and cash equivalents at the end of the first quarter of 2017 decreased slightly to $15.0 million compared with $15.1 million at the end of the fourth quarter of 2016 and $10.0 million at the end of the first quarter of 2016.

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 disclose and discuss a non-GAAP financial measure, adjusted EBITDA, 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 transitions 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.

Prior year Adjusted EBITDA amounts presented herein have been recast to reflect adjusted EBITDA definitional changes described in the Company’s Form 10-Q Quarterly Report for the three months ended September 30, 2016.

The following table reconciles net income to adjusted EBITDA (dollars in thousands):

 Three months ended March 31
 2017 (unaudited)2016 (unaudited)
Net income for the period 2,446 4,438 
Depreciation of property and equipment757 420 
Amortization of intangible assets1,761 69 
Impairment of intangible assets- 21 
Interest expense, net868 46 
Provision for income taxes(125)1,906 
Stock-based compensation318 200 
Unrealized loss (gain) on change in fair value of forward contracts(18)(243)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities(193)461 
Acquisition and transition costs1382 - 
   
Adjusted EBITDA6,196 7,318 
1 Acquisition and transition costs represent non-recurring costs incurred in connection with the acquisition of eNom, Incorporated in January 2017.  These costs are primarily comprised of professional fees for legal, accounting and other services.

During 2016, the Company identified an immaterial error that affects the classification of certain marketing program costs. Prior to the third quarter of fiscal 2016, the Company recorded the cost for certain marketing credits as Sales and marketing expense which should have been recorded as a reduction in Net revenue. The discussion presented here correctly reflect these marketing credits as a reduction in Net Revenues for all current and comparative periods. This resulted in a decrease in Net Revenues, and a corresponding decrease in Sales and marketing expenses of $0.9 million for the three months ended March 31, 2016.

2. 2017 adjusted EBITDA goal

The adjusted EBITDA goal information discussed above is a non-GAAP financial measure.  Because we are unable to predict certain potentially material items affecting net income on a GAAP basis at this time, principally the amount deferred revenue will be reduced by the impact of purchasing accounting on historical deferred revenue, we cannot reconcile the estimated adjusted EBITDA for future years, a non-GAAP measure, to net income, the most directly comparable GAAP measure, in reliance on the “unreasonable efforts” exception set forth in SEC rules.

Conference Call
Tucows management will host a conference call today, Tuesday, May 9, 2017 at 5:00 p.m. (ET) to discuss the Company’s first quarter 2017 results. Participants can access the conference call by dialing 1-888-231-8191 or 647-427-7450 or via the Internet at http://www.tucows.com/investors.

For those unable to participate in the conference call at the scheduled time, it will be archived for replay both by telephone and via the Internet beginning approximately one hour following completion of the call. To access the archived conference call by telephone, dial 416-849-0833 or 1-855-859-2056 and enter the passcode 16809774 followed by the pound key. The telephone replay will be available until Tuesday, May 16, 2017 at midnight. To access the archived conference call as an MP3 via the Internet, go to http://www.tucows.com/investors.

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) and Enom (http://www.enom.com) manage a combined 29 million domain names and millions of value-added services through a global reseller network of over 40,000 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 U.S. dollars) 
      
  March 31, December 31, 
   2017  2016 
  (unaudited) (unaudited) 
      
Assets     
      
Current assets:     
Cash and cash equivalents $15,032,821 $15,105,075 
Accounts receivable  13,354,774  10,925,622 
Inventory  1,039,793  1,210,789 
Prepaid expenses and deposits  16,101,078  6,250,555 
Derivative instrument asset, current portion  356,525  172,888 
Prepaid domain name registry and ancillary services fees, current portion  112,060,197  49,396,737 
Income taxes recoverable  2,874,532  220,451 
Total current assets  160,819,720  83,282,117 
      
Prepaid domain name registry and ancillary services fees, long-term portion  24,463,113  10,993,156 
Property and equipment  18,403,439  13,450,438 
Deferred tax asset  -  5,708,725 
Intangible assets  62,503,033  19,973,793 
Goodwill  85,526,787  21,005,143 
Total assets $351,716,092 $154,413,372 
      
      
Liabilities and Stockholders' Equity     
      
Current liabilities:     
Accounts payable $7,246,007 $4,786,645 
Accrued liabilities  9,518,273  7,098,905 
Customer deposits  14,056,627  5,418,622 
Deferred rent, current portion  20,854  20,854 
Loan payable, current portion  18,289,853  2,233,110 
Deferred revenue, current portion  134,459,471  62,795,079 
Accreditation fees payable, current portion  1,293,276  528,027 
Income taxes payable  777,971  1,548,121 
Total current liabilities  185,662,332  84,429,363 
      
Deferred revenue, long-term portion  31,429,228  15,053,977 
Accreditation fees payable, long-term portion  258,560  115,084 
Deferred rent, long-term portion  128,234  124,202 
Loan payable, long-term portion  72,174,607  8,015,698 
Other liabilities  815,860  944,680 
Deferred tax liability  20,166,540  4,827,192 
      
Redeemable non-controlling interest  1,098,589  3,086,090 
      
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; 10,504,152 shares issued and outstanding as of March 31, 2017 and 10,461,574 shares issued and outstanding as of December 31, 2016  14,783,156  14,460,500 
Additional paid-in capital  2,160,720  2,857,921 
Retained earnings  22,833,503  20,399,511 
Accumulated other comprehensive income (loss)  204,763  99,154 
Total stockholders' equity  39,982,142  37,817,086 
Total liabilities and stockholders' equity $351,716,092 $154,413,372 
      

 

  Tucows  Inc. 
  Consolidated Statements of Operations 
  (Dollar amounts in U.S. dollars) 
      
   
Three months ended March 31, 
 
  2017  2016  
      
  (unaudited) 
      
Net revenues$69,568,062 $44,746,089  
      
Cost of revenues:     
Cost of revenues 49,310,712  28,806,717  
Network expenses (*) 2,343,196  1,232,931  
Depreciation of property and equipment 590,347  346,753  
Amortization of intangible assets 380,162  11,532  
Total cost of revenues 52,624,417  30,397,933  
      
Gross profit 16,943,645  14,348,156  
      
Expenses:     
Sales and marketing (*) 7,219,322  4,465,056  
Technical operations and development (*) 1,694,141  1,176,360  
General and administrative (*) 3,457,343  2,404,927  
Depreciation of property and equipment 166,317  73,268  
Amortization of intangible assets 1,380,809  56,997  
Impairment of indefinite life intangible assets -  20,985  
Loss (gain) on currency forward contracts (34,425) (110,757) 
Total expenses 13,883,507  8,086,836  
      
Income from operations 3,060,138  6,261,320  
      
Other income (expenses):     
Interest expense, net (867,993) (46,172) 
Other income 128,897  128,820  
Total other income (expenses) (739,096) 82,648  
      
Income before provision for income taxes 2,321,042  6,343,968  
      
Provision for income taxes (125,449) 1,905,730  
Net income before redeemable non-controlling interest 2,446,491  4,438,238  
      
Redeemable non-controlling interest (125,764) (170,792) 
      
Net (earnings) loss attributable to redeemable non-controlling interest 125,764  170,792  
      
Net income for the period 2,446,491  4,438,238  
      
Other comprehensive income (loss), net of tax     
Unrealized income (loss) on hedging activities 186,229  547,963  
Net amount reclassified to earnings (80,620) 335,557  
Other comprehensive income (loss) net of tax of 60,079 for the three months ended March 31, 2017 and  $483,704 for the three months ended March 31, 2016 105,609  883,520  
      
Comprehensive income, net of tax for the period$2,552,100 $5,321,758  
      
Basic earnings per common share$0.23 $0.42  
      
Shares used in computing basic earnings per common share 10,474,647  10,674,036  
      
Diluted earnings per common share$0.23 $0.41  
      
Shares used in computing diluted earnings per common share 10,776,515  10,861,582  
      
      
      
(*) Stock-based compensation has been included in expenses as follows:     
Network expenses$4,383 $6,795  
Sales and marketing$59,001 $54,878  
Technical operations and development$61,410 $26,398  
General and administrative$193,026 $112,157  
      

 

   Tucows  Inc. 
   Consolidated Statements of Cash Flows 
   (Dollar amounts in U.S. dollars) 
     
   
Three months ended March 31, 
  2017  2016 
Cash provided by:  (unaudited) 
Operating activities:    
 Net income for the period  $ 2,446,491 $4,438,238 
Items not involving cash:    
Depreciation of property and equipment 756,664  420,021 
Amortization of debt discount and issuance costs 67,105  - 
Amortization of intangible assets 1,760,971  68,529 
Impairment of indefinite life intangible asset -  20,985 
Deferred income taxes 1,319,819  273,159 
Excess tax benefits on share-based compensation expense (989,332) 61,360 
Amortization of deferred rent 4,032  11,915 
Disposal of domain names 9,789  8,220 
Other income (128,820) (128,820)
Loss (gain) on change in the fair value of forward contracts (138,107) (243,042)
Stock-based compensation 317,820  200,228 
Change in non-cash operating working capital:    
Accounts receivable 41,721  (890,510)
Inventory 170,996  (239,087)
Prepaid expenses and deposits (3,557,508) (252,924)
Prepaid domain name registry and ancillary services fees (5,489,422) (797,920)
Income taxes recoverable (2,660,528) 1,226,454 
Accounts payable (3,446,427) 549,796 
Accrued liabilities 1,830,922  (451,246)
Customer deposits (83,591) (179,923)
Deferred revenue 10,240,649  1,508,582 
Accreditation fees payable (71,327) 10,619 
Net cash provided by operating activities 2,401,917  5,614,634 
     
Financing activities:    
Proceeds received on exercise of stock options 19,869  19,558 
Payment of tax obligations resulting from net exercise of stock options (712,234) (36,685)
Repurchase of common stock -  (2,180,279)
Proceeds received on loan payable 86,998,000  6,000,000 
Repayment of loan payable (6,258,278) (218,750)
Payment of loan payable costs (591,175) - 
Net cash used in financing activities 79,456,182  3,583,844 
     
Investing activities:    
Additions to property and equipment (3,692,893) (856,336)
Remaining payment for the acquisition of Ting Virginia, LLC., net of cash (2,000,000) - 
Acquisition of Enom Incorporated, net of cash (76,237,460) - 
Acquisition of intangible assets -  (6,054,546)
Net cash used in investing activities (81,930,353) (6,910,882)
     
Increase (decrease) in cash and cash equivalents (72,254) 2,287,596 
     
Cash and cash equivalents, beginning of period   15,105,075    7,723,253 
Cash and cash equivalents, end of period$15,032,821 $10,010,849 
     
Supplemental cash flow information:    
Interest paid$872,645  $ 46,381 
Income taxes paid, net$2,342,916  $ 329,169 
     
Supplementary disclosure of non-cash investing and financing activities:    
Property and equipment acquired during the period not yet paid for$250,847 $11,338 
     

 

   Tucows  Inc.   
   Reconciliation of Net income to Adjusted EBITDA  
   (In Thousands of US Dollars)   
      
  Three months ended March 31 
 
  2017  2016  
   (unaudited)  
      
Net income for the period $2,446 $4,438  
Depreciation of property and equipment  757  420  
Amortization of intangible assets  1,761  69  
Impairment of intangible assets -  21  
Interest expense, net 868  46  
Provision for income taxes  (125) 1,906  
Stock-based compensation 318  200  
Unrealized loss (gain) on change in fair value of forward contracts (18) (243) 
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities (193) 461  
Acquisition and transition costs1 382  -  
      
Adjusted EBITDA$6,196 $7,318  
      
1Acquisition and transition costs represent non-recurring costs incurred in connection with the acquisition of eNom, Incorporated in January 2017.  These costs are primarily comprised of professional fees for legal, accounting and other services. 
      

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 expectation regarding our ability to manage realized gains/losses from foreign currency contracts. 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® is a registered trademark of Tucows Inc. or its subsidiaries. All other trademarks and service marks are the properties of their respective owners.

Contact:
Michael Goldstein
(416) 538-5451
mgoldstein@tucows.com

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