Tucows Reports Continuing Strong Financial Results for Second Quarter of 2017

TORONTO, Aug. 08, 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 second quarter ended June 30, 2017. 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
2017
(Unaudited)
2016
(Unaudited)
% Change2017
(Unaudited)
2016
(Unaudited)
% Change
Net revenue84,22347,20478%153,79191,95067%
Net income5,2414,07129%7,6888,509(10%)
Basic Net earnings per common share0.500.3928%0.730.80(9%)
Adjusted EBITDA1,210,3406,90550%16,53614,22216%
Net cash provided by operating activities8,1322,558218%10,5348,17329%
         
  1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table. In the second quarter of 2016, Tucows revised its definition of Adjusted EBITDA as detailed in the description below and the table reconciling Adjusted EBITDA to GAAP net income.
  2. Adjusted EBITDA for the second quarter and first six months of 2017 reflect the impact 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 $1.6 million and $5.5 million for the second quarter and first six months of 2017, respectively.
   
Summary of Revenues and Gross Margin
(In Thousands of US Dollars)
   
 RevenueGross Margin
 3 Months ended
June 30
3 Months ended
June 30
 2017
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
2016
(Unaudited)
Network Access Services:
Mobile Services20,37917,8059,677 8,425 
Other Services1,087964121 493 
Total Network Access Services21,46618,7699,798 8,918 
     
Domain Services:
Wholesale    
Domain Services48,55021,6666,101 4,028 
Value Added Services5,5762,3084,981 1,849 
Total Wholesale54,12623,97411,082 5,877 
     
Retail7,6633,5763,115 1,913 
Portfolio968885783 704 
Total Domain Services62,75728,43514,980 8,494 
     
Network Expenses:
Network, other costs--(2,261)(1,405)
Network, depreciation and amortization costs--(1,170)(362)
Total Network expenses--(3,431)(1,767)
     
Total revenue/gross margin84,22347,20421,347 15,645 
       

“The second quarter of 2017 saw continued strong performance across all areas of the business our first full quarter following the Enom acquisition in January, which combined to drive year-over-year growth in revenue of 78% to a record $84 million, record earnings per share of $0.50 and cash flow from operations of more than $8.1 million,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc.

“We continue to execute well on each of our strategic initiatives. Our domains team made great progress on the integration of Enom toward significant future synergies and, in fact, exceeded our expectations year to date on organic growth. Our Ting Mobile business continued to add customers on the core base and saw the lowest monthly churn from our core base in two years. Ting Internet continued its steady climb in Charlottesville, ramped significantly in both Westminster, Maryland and Holly Springs, North Carolina  and, most importantly, took meaningful operational steps toward scalability far beyond our existing Ting Towns.”

Financial Results

Net revenue for the second quarter of 2017 increased 78% to $84.2 million from $47.2 million for the second quarter of 2016.

Net income for the second quarter of 2017 increased 29% to 5.2 million, or $0.50 per share, from $4.1 million, or $0.39 per share, for the second quarter of 2016. Adjusted EBITDA1 for the second quarter of 2017 increased 50% to $10.3 million from $6.9 million for the second quarter of 2016.  The increase in EBITDA was largely driven by the acquisition of Enom and to a lesser extent growth in the Company’s Ting Mobile and incumbent Domains business. 

Cash and cash equivalents at the end of the second quarter of 2017  were $15.1 million compared with $15.0 million at the end of the first quarter of 2017 and $5.9 million at the end of the second 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.

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

 3 months ended June 306 months ended June 30*
 2017
(unaudited)
2016
(unaudited)
2017
(unaudited)
2016
(unaudited)
Net income for the period 5,241 4,071 7,688 8,509 
Depreciation of property and equipment879 428 1,636 848 
Amortization of intangible assets2,064 288 3,825 357 
Impairment of intangible assets- 4 - 25 
Interest expense, net970 121 1,838 167 
Provision for income taxes1,083 2,078 958 3,983 
Stock-based compensation313 190 631 390 
Unrealized loss (gain) on change in fair value of forward contracts(20)(29)(38)(272)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities(317)(246)(511)215 
Acquisition and transition costs**127 - 509 - 
     
Adjusted EBITDA10,340 6,905 16,536 14,222 
*Adjusted EBITDA amounts presented herein for the six months ended June 30, 2016 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.
 

**Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, related to our acquisition of Enom in January 2017.  Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.

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 $0.3 million for the three months ended June 30, 2016 and $1.1 million for the six months ended June 30, 2016.

Conference Call
Tucows management will host a conference call today, Tuesday, August 8, 2017 at 5:00 p.m. (ET) to discuss the Company’s second 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 59387346 followed by the pound key. The telephone replay will be available until Tuesday, August 15, 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)
      
  June 30,  December 31,
   2017   2016
  (unaudited)  (unaudited)
      
Assets     
      
Current assets:     
Cash and cash equivalents $15,145,979  $15,105,075
Accounts receivable  14,260,465   10,925,622
Inventory  2,306,434   1,210,789
Prepaid expenses and deposits  14,914,646   6,250,555
Derivative instrument asset, current portion  573,378   172,888
Prepaid domain name registry and ancillary services fees, current portion  109,526,920   49,396,737
Income taxes recoverable  2,184,634   220,451
Total current assets  158,912,456   83,282,117
      
Prepaid domain name registry and ancillary services fees, long-term portion  24,020,136   10,993,156
Property and equipment  20,405,942   13,450,438
Deferred tax asset  -   5,708,725
Intangible assets  60,432,167   19,973,793
Goodwill  87,486,243   21,005,143
Total assets $351,256,944  $154,413,372
      
      
Liabilities and Stockholders' Equity     
      
Current liabilities:     
Accounts payable $6,635,890  $4,786,645
Accrued liabilities  7,700,707   7,098,905
Customer deposits  17,208,189   5,418,622
Deferred rent, current portion  20,891   20,854
Loan payable, current portion  18,289,853   2,233,110
Deferred revenue, current portion  133,161,879   62,795,079
Accreditation fees payable, current portion  1,247,213   528,027
Income taxes payable  860,452   1,548,121
Total current liabilities  185,125,074   84,429,363
      
Deferred revenue, long-term portion  31,453,857   15,053,977
Accreditation fees payable, long-term portion  304,475   115,084
Deferred rent, long-term portion  129,649   124,202
Loan payable, long-term portion  67,669,773   8,015,698
Deferred Gain  687,040   944,680
Deferred tax liability  19,650,592   4,827,192
      
Redeemable non-controlling interest  1,111,138   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; 10,552,401 shares issued and outstanding as of June 30, 2017 and 10,461,574 shares issued and outstanding as of December 31, 2016  15,125,326   14,460,500
Additional paid-in capital  1,607,476   2,857,921
Retained earnings  28,062,438   20,399,511
Accumulated other comprehensive income  330,106   99,154
Total stockholders' equity  45,125,346   37,817,086
Total liabilities and stockholders' equity $351,256,944  $154,413,372
      

 

Tucows  Inc. 
Consolidated Statements of Operations 
(Dollar amounts in U.S. dollars) 
           
   Three months ended June 30,    Six months ended June 30, 
   2017  2016   2017   2016 
                
  (unaudited)  (unaudited)
           
Net revenues$ 84,223,301 $47,203,913  $153,791,363  $91,950,003 
           
Cost of revenues:          
Cost of revenues  59,445,344  29,792,108   108,756,056   58,598,827 
Network expenses (*)  2,260,566  1,404,826   4,603,762   2,637,757 
Depreciation of property and equipment  714,629  350,920   1,304,976   697,673 
Amortization of intangible assets  455,402  11,532   835,564   23,064 
Total cost of revenues  62,875,941  31,559,386   115,500,358   61,957,321 
           
Gross profit  21,347,360  15,644,527   38,291,005   29,992,682 
           
Expenses:          
Sales and marketing (*)  7,447,225  5,230,118   14,666,547   9,695,174 
Technical operations and development (*)  1,798,097  998,651   3,492,238   2,175,011 
General and administrative (*)  3,286,610  2,926,608   6,743,953   5,331,535 
Depreciation of property and equipment  164,693  76,922   331,010   150,190 
Amortization of intangible assets  1,608,489  276,918   2,989,298   333,915 
Impairment of indefinite life intangible assets  -  3,894   -   24,879 
Loss (gain) on currency forward contracts  (26,776) (8,711)  (61,201)  (119,468)
Total expenses  14,278,338  9,504,400   28,161,845   17,591,236 
           
Income from operations  7,069,022  6,140,127   10,129,160   12,401,446 
           
Other income (expenses):          
Interest expense, net  (970,029) (120,528)  (1,838,022)  (166,699)
Other income  225,481  128,820   354,378   257,640 
Total other income (expenses)  (744,548) 8,292   (1,483,644)  90,941 
           
Income before provision for income taxes  6,324,474  6,148,419   8,645,516   12,492,387 
           
Provision for income taxes  1,082,990  2,077,633   957,541   3,983,363 
Net income before redeemable non-controlling interest  5,241,484  4,070,786   7,687,975   8,509,024 
           
Redeemable non-controlling interest  (117,294) (273,690)  (243,058)  (444,482)
           
Net income attributable to redeemable non-controlling interest  117,294  273,690   243,058   444,482 
Net income for the period  5,241,484  4,070,786   7,687,975   8,509,024 
           
Other comprehensive income (loss), net of tax          
Unrealized income (loss) on hedging activities  142,768  27,264   328,997   575,227 
Net amount reclassified to earnings  (17,425) 79,367   (98,045)  414,924 
Other comprehensive income (loss) net of tax of $71,303 and $60,659 for the three months ended June 30, 2017 and  June 30, 2016, and $131,382 and $544,363 for the six months ended June 30, 2017 and  June 30, 2016  125,343  106,631   230,952   990,151 
           
Comprehensive income, net of tax for the period$ 5,366,827 $4,177,417  $7,918,927  $9,499,175 
           
Basic earnings per common share$ 0.50 $0.39  $0.73  $0.80 
           
Shares used in computing basic earnings per common share  10,528,219  10,541,659   10,501,407   10,607,843 
           
Diluted earnings per common share$ 0.49 $0.38  $0.71  $0.79 
           
Shares used in computing diluted earnings per common share  10,793,031  10,733,860   10,785,685   10,797,458 
           
           
           
(*) Stock-based compensation has been included in expenses as follows:          
Network expenses$ 3,432 $5,069  $7,815  $11,864 
Sales and marketing$ 61,049 $60,385  $120,050  $115,263 
Technical operations and development$ 57,564 $25,003  $118,974  $51,401 
General and administrative$ 191,220 $99,730  $384,246  $211,887 
           

 

 
Tucows  Inc. 
Consolidated Statements of Cash Flows 
 (Dollar amounts in U.S. dollars) 
            
   Three months ended June 30,    Six months ended June 30, 
  2017   2016   2017   2016 
                
Cash provided by: (unaudited)  (unaudited)
Operating activities:           
Net income for the period$5,241,484  $4,070,786  $7,687,975  $8,509,024 
Items not involving cash:           
Depreciation of property and equipment 879,322   427,842   1,635,986   847,863 
Loss on write off of property and equipment 8,794   -   8,794   - 
Amortization of debt discount and issuance costs 80,207   -   147,312   - 
Amortization of intangible assets 2,063,891   288,450   3,824,862   356,979 
Impairment of indefinite life intangible asset -   3,894   -   24,879 
Deferred income taxes (2,885,373)  430,184   (1,565,554)  703,343 
Excess tax benefits on share-based compensation expense (1,181,754)  384,839   (2,171,086)  446,199 
Amortization of deferred rent 1,452   4,749   5,484   16,664 
Loss on disposal of domain names 6,976   12,601   16,765   20,821 
Other income (128,820)  (128,820)  (257,640)  (257,640)
Loss (gain) on change in the fair value of forward contracts (162,813)  (28,977)  (300,920)  (272,019)
Stock-based compensation 313,265   190,187   631,085   390,415 
Change in non-cash operating working capital:           
Accounts receivable (905,691)  (1,921,021)  (863,970)  (2,811,531)
Inventory (1,266,641)  (141,830)  (1,095,645)  (380,917)
Prepaid expenses and deposits 1,186,432   (1,106,950)  (2,371,076)  (1,359,874)
Prepaid domain name registry and ancillary services fees 2,976,254   (3,101,043)  (2,513,168)  (3,898,963)
Income taxes recoverable 2,513,458   (36,174)  (147,070)  1,190,280 
Accounts payable (591,560)  (1,233,092)  (4,037,987)  (683,296)
Accrued liabilities (1,817,566)  (396,328)  13,356   (847,574)
Customer deposits 3,151,562   1,214,472   3,067,971   1,034,549 
Deferred revenue (1,272,963)  3,597,790   8,967,686   5,106,372 
Accreditation fees payable (78,203)  26,537   (149,530)  37,156 
Net cash provided by operating activities 8,131,713   2,558,096   10,533,630   8,172,730 
            
Financing activities:           
Proceeds received on exercise of stock options 84,969   37,209   104,838   56,767 
Payment of tax obligations resulting from net exercise of stock options (609,307)  (203,019)  (1,321,541)  (239,704)
Repurchase of common stock -   (4,999,978)  -   (7,180,257)
Proceeds received on loan payable -   -   86,998,000   6,000,000 
Repayment of loan payable (4,572,462)  (218,750)  (10,830,740)  (437,500)
Payment of loan payable costs (12,579)  (133,500)  (603,754)  (133,500)
Net cash provided by (used in) financing activities (5,109,379)  (5,518,038)  74,346,803   (1,934,194)
            
Investing activities:           
Additions to property and equipment (2,909,176)  -   (6,602,069)  - 
Gross proceeds from the waiver of rights to .online registry -   (975,401)  -   (1,831,737)
Acquisition of a portion of the minority interest in Ting Virginia, LLC. -   -   (2,000,000)  - 
Acquisition of Enom Incorporated, net of cash -   -   (76,237,460)  - 
Acquisition of intangible assets -   (196,024)  -   (6,250,570)
Net cash used in investing activities (2,909,176)  (1,171,425)  (84,839,529)  (8,082,307)
            
Increase (decrease) in cash and cash equivalents 113,158   (4,131,367)  40,904   (1,843,771)
            
Cash and cash equivalents, beginning of period 15,032,821   10,010,849   15,105,075   7,723,253 
Cash and cash equivalents, end of period$15,145,979  $5,879,482  $15,145,979  $5,879,482 
            
Supplemental cash flow information:           
Interest paid$974,984  $120,566  $1,847,629  $166,947 
Income taxes paid, net$2,662,666  $1,274,739  $5,005,582  $1,591,959 
            
Supplementary disclosure of non-cash investing and financing activities:           
Property and equipment acquired during the period not yet paid for$232,290  $46,632  $232,290  $46,632 
            

 

 
Tucows  Inc.  
Reconciliation of Net income to Adjusted EBITDA 
(In Thousands of US Dollars)  
               
   Three months ended June 30,     Six months ended June 30, 
  2017    2016    2017    2016 
                   
  (unaudited)   (unaudited)
               
Net income for the period$5,241   $4,071   $7,688   $8,509 
Depreciation of property and equipment 879    428    1,636    848 
Amortization of intangible assets 2,064    288    3,825    357 
Impairment of intangible assets -    4    -    25 
Interest expense, net 970    121    1,838    167 
Provision for income taxes 1,083    2,078    958    3,983 
Stock-based compensation 313    190    631    390 
Unrealized loss (gain) on change in fair value of forward contracts (20)   (29)   (38)   (272)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities (317)   (246)   (511)   215 
Acquisition and transition costs1 127    -    509    - 
               
Adjusted EBITDA$10,340   $6,905   $16,536   $14,222 
               
1Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, related to our acquisition of eNom in January 2017.  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 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, Ting, OpenSRS, Enom and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

Contact:
Lawrence Chamberlain
(416) 519-4196
lawrence.chamberlain@loderockadvisors.com

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