TMCNet:  Tucows Reports Continuing Strong Financial Results for Third Quarter of 2017

[November 09, 2017]

Tucows Reports Continuing Strong Financial Results for Third Quarter of 2017

TORONTO, Nov. 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 third quarter ended September 30, 2017. 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
2017
(Unaudited)
2016
(Unaudited)
% Change2017
(Unaudited)
2016
(Unaudited)
% Change
Net revenue85,00849,06473%238,800141,01469%
Net income3,4394,741(27%)11,12713,250(16%)
Basic Net earnings per common share0.330.45(27%)1.061.26(16%)
Adjusted EBITDA1,29,3688,5759%26,08222,79814%
Net cash provided by operating activities7,2825,26938%17,81613,44233%
       
  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 third quarter and first nine months of 2017 reflect the impact 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 $1.5 million and $7.0 million for the third quarter and first nine months of 2017, respectively.
 
Summary of Revenues and Gross Margin
(In Thousands of US Dollars)
 
 RevenueGross Margin
 3 Months ended
September 30
3 Months ended
September 30
 2017
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
2016
(Unaudited)
Network Access Services:
Mobile Services21,74918,3759,3839,288
Other Services1,244878299376
Total Network Access Services22,99319,2539,6829,664
     
Domain Services:
Wholesale    
Domain Services47,77022,9565,4764,021
Value Added Services4,4012,2273,7301,764
Total Wholesale52,17125,1839,2065,785
     
Retail8,8733,7214,2621,993
Portfolio971907791776
Total Domain Services62,01529,81114,2598,554
     
Network Expenses:
Network, other costs--(2,461)(1,288)
Network, depreciation and amortization costs--(1,322)(292)
Total Network expenses--(3,783)(1,580)
     
Total revenue/gross margin85,00849,06420,15816,638
     

“This was another strong quarter for both our present and our future,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “As for the present, the third quarter of 2017 was yet another quarter of record revenue at $85 million. For the future, all our business units took steps in the right direction. The integration of our domain name platforms is going well. Ting Mobile continues to grow its customer base and its reputation. Ting Internet is executing well and ramping quickly.”

“I am particularly proud that we can make such meaningful investments in infrastructure, people and customer acquisition without taking a step backwards on topline growth.”

Financial Results

Net revenue for the third quarter of 2017 increased 73% to $85.0 million from $49.1 million for the third quarter of 2016.

Net income for the third quarter of 2017 decreased 27% to $3.4 million, or $0.33 per share, from $4.7 million, or $0.45 per share, for the third quarter of 2016. Adjusted EBITDA1 for the third quarter of 2017 increased 9% to $9.4 million from $8.6 million for the third quarter of 2016.  The increase in adjusted EBITDA1 was largely the result of the acquisition of Enom in January 2017 and, to a lesser extent, continued growth in the Company’s incumbent Domains business.  Year-over-year growth in adjusted EBITDA1 was negatively impacted by two factors that benefitted the third quarter of 2016.  Ting Mobile received a cost decrease from its network suppliers in advance of permanently passing the decrease on to customers.  In addition, the Company recorded a reversal of an overachievement bonus accrual of in the third quarter of 2016 that was not repeated in the third quarter of 2017. These one-time occurrences inflated third quarter 2016 adjusted EBITDA1 by more than $0.9 million.

Cash and cash equivalents at the end of the third quarter of 2017 were $12.5 million compared with $15.1 million at the end of the second quarter of 2017 and $10.5 million at the end of the third 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
September 30
9 months ended
September 30*
 2017
(unaudited)
2016
(unaudited)
2017
(unaudited)
2016
(unaudited)
Net income for the period 3,4394,74111,12713,250
Depreciation of property and equipment9784572,6141,305
Amortization of intangible assets2,2452936,070650
Impairment of intangible assets23228
Interest expense, net8641352,703302
Provision for income taxes1,8232,4932,7816,476
Stock-based compensation203195834586
Unrealized loss (gain) on change in fair value of forward contracts1(20)(37)(292)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities(426)278(760)493
Acquisition and transition costs**239-748-
     
Adjusted EBITDA9,3688,57526,08222,798
*Adjusted EBITDA amounts presented herein for the nine months ended September 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.
 

Conference Call
Tucows management will host a conference call today, Thursday, November 9, 2017 at 5:00 p.m. (ET) to discuss the Company’s third 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 3676019 followed by the pound key. The telephone replay will be available until Thursday, November 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 28 million domain names and millions of value-added services through a global reseller network of over 39,000 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).
  
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

      
Tucows  Inc.
 
Consolidated Balance Sheets
 
(Dollar amounts in U.S. dollars)
 
      
  September 30, December 31, 
  2017 2016 
  (unaudited) (unaudited) 
      
Assets     
      
Current assets:     
Cash and cash equivalents $12,547,059 $15,105,075 
Accounts receivable  13,726,565  10,925,622 
Inventory  2,949,172  1,210,789 
Prepaid expenses and deposits  14,712,889  6,250,555 
Derivative instrument asset, current portion  559,663  172,888 
Prepaid domain name registry and ancillary services fees, current portion  106,672,400  49,396,737 
Income taxes recoverable  780,185  220,451 
Total current assets  151,947,933  83,282,117 
      
Prepaid domain name registry and ancillary services fees, long-term portion  23,791,150  10,993,156 
Property and equipment  22,232,870  13,450,438 
Deferred tax asset  -  5,708,725 
Intangible assets  60,562,113  19,973,793 
Goodwill  87,486,243  21,005,143 
Total assets $346,020,309 $154,413,372 
      
      
Liabilities and Stockholders' Equity     
      
Current liabilities:     
Accounts payable $5,946,691 $4,786,645 
Accrued liabilities  8,681,752  7,098,905 
Customer deposits  15,303,523  5,418,622 
Deferred rent, current portion  20,947  20,854 
Loan payable, current portion  18,289,853  2,233,110 
Deferred revenue, current portion  131,971,919  62,795,079 
Accreditation fees payable, current portion  1,201,477  528,027 
Income taxes payable  1,239,754  1,548,121 
Total current liabilities  182,655,916  84,429,363 
      
Deferred revenue, long-term portion  31,219,144  15,053,977 
Accreditation fees payable, long-term portion  299,909  115,084 
Deferred rent, long-term portion  129,656  124,202 
Loan payable, long-term portion  63,137,229  8,015,698 
Deferred Gain  558,220  944,680 
Deferred tax liability  18,198,544  4,827,192 
      
Redeemable non-controlling interest  1,123,738  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; 10,577,549 shares issued and outstanding as of September 30, 2017 and 10,461,574 shares issued and outstanding as of December 31, 2016   15,284,633  14,460,500 
Additional paid-in capital  1,602,181  2,857,921 
Retained earnings  31,489,104  20,399,511 
Accumulated other comprehensive income  322,035  99,154 
Total stockholders' equity  48,697,953  37,817,086 
Total liabilities and stockholders' equity $  346,020,309 $  154,413,372 
      

 

         
Tucows  Inc. 
Consolidated Statements of Operations 
(Dollar amounts in U.S. dollars) 
         
   Three months ended September 30, 
  Nine months ended September 30, 
  2017
 2016
 2017
 2016
  (unaudited)
 (unaudited)
         
Net revenues$ 85,008,484 $ 49,064,327 $ 238,799,847 $ 141,014,329 
         
Cost of revenues:        
Cost of revenues 61,066,761  30,846,668  169,822,817  89,445,493 
Network expenses (*) 2,460,696  1,287,620  7,064,458  3,925,377 
Depreciation of property and equipment 823,441  278,746  2,128,417  976,419 
Amortization of intangible assets 499,032  13,421  1,334,596  36,485 
Total cost of revenues 64,849,930  32,426,455  180,350,288  94,383,774 
         
Gross profit 20,158,554  16,637,872  58,449,559  46,630,555 
         
Expenses:        
Sales and marketing (*) 7,578,414  5,479,445  22,244,961  15,174,619 
Technical operations and development (*) 1,910,147  1,270,107  5,402,385  3,445,118 
General and administrative (*) 2,852,345  2,166,217  9,596,298  7,497,752 
Depreciation of property and equipment 154,638  178,687  485,648  328,877 
Amortization of intangible assets 1,745,923  279,126  4,735,221  613,041 
Impairment of indefinite life intangible assets 1,500  2,866  1,500  27,745 
Loss (gain) on currency forward contracts (54,075) 22,475  (115,276) (96,993)
Total expenses 14,188,892  9,398,923  42,350,737  26,990,159 
         
Income from operations 5,969,662  7,238,949  16,098,822  19,640,396 
         
Other income (expenses):        
Interest expense, net (864,482) (135,168) (2,702,504) (301,868)
Other income 157,453  130,147  511,831  387,787 
Total other income (expenses) (707,029) (5,021) (2,190,673) 85,919 
         
Income before provision for income taxes 5,262,633  7,233,928  13,908,149  19,726,315 
         
Provision for income taxes 1,823,367  2,492,649  2,780,908  6,476,012 
Net income before redeemable non-controlling interest 3,439,266  4,741,279  11,127,241  13,250,303 
         
Redeemable non-controlling interest (68,635) (254,101) (311,693) (698,583)
         
Net income attributable to redeemable non-controlling interest 68,635  254,101  311,693  698,583 
Net income for the period 3,439,266  4,741,279  11,127,241  13,250,303 
         
Other comprehensive income (loss), net of tax        
Unrealized income (loss) on hedging activities 309,445  (58,821) 638,442  516,406 
Net amount reclassified to earnings (317,516) 131,912  (415,561) 546,836 
Other comprehensive income (loss) net of tax of $4,591 and $41,580 for the three months ended September 30, 2017 and September 30, 2016, and $126,791 and $585,943 for the nine months ended September 30, 2017 and September 30, 2016  (8,071) 73,091  222,881  1,063,242 
         
Comprehensive income, net of tax for the period$3,431,195 $4,814,370 $11,350,122 $14,313,545 
         
Basic earnings per common share$0.33 $0.45 $1.06 $1.26 
         
Shares used in computing basic earnings per common share 10,564,311  10,432,763  10,522,841  10,549,056 
         
Diluted earnings per common share$0.32 $0.45 $1.03 $1.23 
         
Shares used in computing diluted earnings per common share 10,785,342  10,619,005  10,785,050  10,736,775 
         
         
         
(*) Stock-based compensation has been included in expenses as follows:        
Network expenses$51,795 $4,920 $59,610 $16,784 
Sales and marketing$197,476 $60,832 $317,526 $176,095 
Technical operations and development$96,379 $23,512 $215,353 $74,913 
General and administrative$(142,748)$106,175 $241,498 $318,062 
         

 

          
Tucows  Inc. 
 
Consolidated Statements of Cash Flows 
 
(Dollar amounts in U.S. dollars) 
 
          
   Three months ended September 30, 
  Nine months ended September 30, 
 
  2017
 2016
 2017
 2016
 
Cash provided by: (unaudited)
 (unaudited)
 
Operating activities:         
Net income for the period$3,439,266 $4,741,279 $11,127,241 $13,250,303  
Items not involving cash:         
Depreciation of property and equipment 978,079  457,433  2,614,065  1,305,296  
Loss on write off of property and equipment 8,157  -  16,951  -  
Amortization of debt discount and issuance costs 56,559  8,298  203,871  8,298  
Amortization of intangible assets 2,244,955  292,547  6,069,817  649,526  
Impairment of indefinite life intangible asset 1,500  2,866  1,500  27,745  
Deferred income taxes (1,445,241) 926,733  (3,010,795) 1,630,076  
Excess tax benefits on share-based compensation expense (443,718) 268,565  (2,614,804) 714,764  
Amortization of deferred rent 63  13,783  5,547  30,447  
Loss on disposal of domain names 7,896  4,760  24,661  25,581  
Other income (128,820) (128,820) (386,460) (386,460) 
Loss (gain) on change in the fair value of forward contracts 1,053  (20,114) (37,103) (292,133) 
Stock-based compensation 202,902  195,439  833,987  585,854  
Change in non-cash operating working capital:         
Accounts receivable 533,900  (1,623,719) (330,070) (4,435,250) 
Inventory (642,738) (217,741) (1,738,383) (598,658) 
Prepaid expenses and deposits 201,757  419,939  (2,169,319) (939,935) 
Prepaid domain name registry and ancillary services fees 3,083,506  (1,271,948) 570,338  (5,170,911) 
Income taxes recoverable 2,225,254  363,244  1,815,420  1,553,524  
Accounts payable (643,327) 681,303  (4,681,314) (1,993) 
Accrued liabilities 981,046  (581,495) 994,402  (1,429,069) 
Customer deposits (1,904,666) (943,579) 1,163,305  90,970  
Deferred revenue (1,424,673) 1,666,291  7,543,013  6,772,663  
Accreditation fees payable (50,302) 14,059  (199,832) 51,215  
Net cash provided by operating activities 7,282,408  5,269,123  17,816,038  13,441,853  
          
Financing activities:         
Proceeds received on exercise of stock options 68,065  48,376  172,903  107,672  
Payment of tax obligations resulting from net exercise of stock options (116,956) (76,537) (1,438,497) (318,770) 
Repurchase of common stock -  -  -  (7,180,257) 
Proceeds received on loan payable -  10,989,583  86,998,000  16,989,583  
Repayment of loan payable (4,572,640) (9,062,500) (15,403,380) (9,500,000) 
Payment of loan payable costs (16,463) (383,463) (620,217) (516,963) 
Net cash provided by (used in) financing activities (4,637,994) 1,515,459  69,708,809  (418,735) 
          
Investing activities:         
Additions to property and equipment (2,859,036) (2,091,368) (9,461,105) (3,923,105) 
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 (2,384,298) (74,400) (2,384,298) (6,324,970) 
Net cash used in investing activities (5,243,334) (2,165,768) (90,082,863) (10,248,075) 
          
Increase (decrease) in cash and cash equivalents (2,598,920) 4,618,814  (2,558,016) 2,775,043  
          
Cash and cash equivalents, beginning of period 15,145,979  5,879,482  15,105,075  7,723,253  
Cash and cash equivalents, end of period$12,547,059 $10,498,296 $12,547,059 $10,498,296  
          
Supplemental cash flow information:         
Interest paid$869,749 $93,560 $2,717,378 $260,506  
Income taxes paid, net$1,307,727 $927,826 $6,313,308 $2,507,699  
          
Supplementary disclosure of non-cash investing and financing activities:         
Property and equipment acquired during the period not yet paid for$186,418 $89,860 $186,418 $89,860  
          

 

          
Tucows Inc.  
 
Reconciliation of Net income to Adjusted EBITDA 
 
(In Thousands of US Dollars)  
 
          
   Three months ended September 30, 
  Nine months ended September 30, 
 
  2017
 2016
 2017
 2016
 
  (unaudited)
 (unaudited)
 
          
Net income for the period$3,439 $4,741 $11,127 $13,250  
Depreciation of property and equipment 978  457  2,614  1,305  
Amortization of intangible assets 2,245  293  6,070  650  
Impairment of intangible assets 2  3  2  28  
Interest expense, net 864  135  2,703  302  
Provision for income taxes 1,823  2,493  2,781  6,476  
Stock-based compensation 203  195  834  586  
Unrealized loss (gain) on change in fair value of forward contracts 1  (20) (37) (292) 
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities (426) 278  (760) 493  
Acquisition and transition costs1 239  -  748  -  
          
Adjusted EBITDA$9,368 $8,575 $26,082 $22,798  
          
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.
 
          

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