Tucows Reports Continuing Strong Financial Results for Third Quarter of 2016

EPS Increases 55% Year-Over-Year to a Record $0.45

Toronto, Ontario, CANADA


TORONTO, Nov. 07, 2016 (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, 2016. 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
2016
(Unaudited)
2015
(Unaudited)

% Change
2016
(Unaudited)
2015
(Unaudited)

% Change
Net revenue49,06444,268 11%141,014126,985 11%
Net income4,7413,159 50%13,2508,278 60%
Net earnings per common share0.450.29 55%1.260.75 68%
Adjusted EBITDA18,5755,800 48%22,79815,439 48%
Net cash provided by operating activities5,0016,783 -26%12,72711,957 6%


  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
September 30
3 Months ended
September 30
 2016
(Unaudited)
2015
(Unaudited)
2016
(Unaudited)
2015
(Unaudited)
Network Access Services:
Mobile Services18,37515,359 9,288  6,583 
Other Services878916 376  542 
    Total Network Access Services19,25316,275 9,664  7,125 
     
Domain Services:
Wholesale    
  Domain Services22,95621,124 4,021  3,642 
  Value Added Services2,2272,400 1,764  1,913 
    Total Wholesale25,18323,524 5,785  5,555 
     
Retail3,7213,220 1,993  1,790 
Portfolio9071,248 776  1,079 
    Total Domain Services29,81127,992 8,554  8,424 
     
Network Expenses:
Network, other costs (1,288) (1,421)
Network, depreciation and amortization costs (292) (336)
    Total Network expenses (1,580) (1,757)
     
Total revenue/gross margin49,06444,268 16,638  13,792 

“Continuing growth in both Ting Mobile and our Domain Services business propelled Tucows to a record quarter for both the top and bottom lines,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “We continue to reap the benefits of the significant operating leverage in the business.  Overall revenue was up 11% year-over-year, while net income grew 50% to a record $4.7 million, or $0.45 per share, and adjusted EBITDA1 increased 48% to a record $8.6 million.”

“As Ting Mobile and Domain Services continue to drive our near-term financial performance, Ting Internet takes positive steps every day toward future contribution to our business. In Q2, we expanded our fiber network in Charlottesville, Virginia, began construction in Holly Springs, North Carolina and saw Westminster, Maryland launch the next wave of construction on its municipal fiber network. We also announced that Centennial, Colorado would be our next and largest Ting town to date, with a population over 100,000, and began taking pre-orders there immediately.”

Net revenue for the third quarter of 2016 increased 11% to a record $49.1 million from $44.3 million for the third quarter of 2015.

Net income for the third quarter of 2016 increased to a record $4.7 million, or $0.45 per share, from $3.2 million, or $0.29 per share, for the third quarter of 2015.  Adjusted EBITDA1 for the third quarter of 2016 increased to $8.6 million from $5.8 million for the third quarter of 2015.

Cash and cash equivalents at the end of the third quarter of 2016 were $10.5 million compared with $5.9 million at the end of the second quarter of 2016 and $11.9 million at the end of the third quarter of 2015. The increase relative to the second quarter of 2016 was primarily the result of cash provided by operating activities of $5.0 million, as well as an increase in the amount outstanding on the bank loan of $1.9 million, which partially offset by a further investment of $2.1 million in property and equipment, primarily for the continued build out of the Ting Internet footprint.

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. 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.

During the financial statement close for the three months ended September 30, 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 and $0.9 million for the three months and nine months ended September 30, 2015. For the nine months ended September 30, 2016, Net revenues and Sales and marketing expenses reflect a reduction of $1.1 million for the reclassification of credits for the first six months of fiscal 2016. 

Conference Call
Tucows management will host a conference call today, Monday, November 7, 2016 at 5:00 p.m. (ET) to discuss the Company’s third quarter 2016 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 3037132 followed by the pound key. The telephone replay will be available until Monday, November 14, 2016 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) manages nearly 15 million domain names and millions of value-added services through a global reseller network of over 13,000 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) 
      
  September 30, December 31, 
   2016   2015  
  (unaudited) (unaudited) 
      
Assets     
      
Current assets:     
Cash and cash equivalents $  10,498,296  $  7,723,253  
Accounts receivable  11,606,638   7,171,388  
Inventory  1,502,433   903,775  
Prepaid expenses and deposits  6,007,725   5,067,790  
Prepaid domain name registry and ancillary services fees, current portion  49,735,226   44,708,041  
Income taxes recoverable  1,743,308   2,292,915  
Total current assets  81,093,626   67,867,162  
      
Prepaid domain name registry and ancillary services fees, long-term portion  11,184,655   11,040,929  
Property and equipment  9,617,147   7,126,676  
Deferred tax asset  5,355,575   7,621,092  
Intangible assets  20,091,795   14,469,677  
Goodwill  21,005,143   21,005,143  
Total assets $148,347,941  $129,130,679  
      
      
Liabilities and Stockholders' Equity     
      
Current liabilities:     
Accounts payable $  4,036,804  $  4,166,135  
Accrued liabilities  4,426,617   5,855,686  
Customer deposits  5,227,879   5,136,909  
Derivative instrument liability, current portion  85,769   2,027,086  
Deferred rent, current portion  20,854   19,463  
Loan payable, current portion  1,933,110   3,500,000  
Deferred revenue, current portion  63,120,230   56,646,390  
Accreditation fees payable, current portion  520,033   465,300  
Income taxes payable  1,447,970   444,053  
Total current liabilities  80,819,266   78,261,022  
      
Deferred revenue, long-term portion  15,246,462   14,947,639  
Accreditation fees payable, long-term portion  114,962   118,480  
Deferred rent, long-term portion  129,920   100,864  
Loan payable, long-term portion  8,547,808   -  
Other liabilities  1,073,500   1,459,960  
Deferred tax liability  4,827,192   4,876,691  
      
Redeemable non-controlling interest  3,073,642   3,036,598  
      
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; 10,448,283 shares issued and outstanding as of September 30, 2016 and 10,685,599 shares issued and outstanding as of December 31, 2015  14,401,326   14,530,633  
Additional paid-in capital  2,564,965   8,526,395  
Retained earnings  17,595,108   4,381,849  
Accumulated other comprehensive income (loss)  (46,210)  (1,109,452) 
Total stockholders' equity  34,515,189   26,329,425  
Total liabilities and stockholders' equity $ 148,347,941  $129,130,679  
      

 

Tucows Inc.
Consolidated Statements of Operations
(Dollar amounts in U.S. dollars)
         
  Three months ended September 30, Nine months ended September 30,
   2016   2015   2016   2015 
  (unaudited) (unaudited)
         
Net revenues$   49,064,327     44,267,645     141,014,329 $   126,985,121 
         
Cost of revenues:        
Cost of revenues  30,846,668   28,718,613     89,445,493     83,767,472 
Network expenses (*)    1,287,620     1,421,279     3,925,377     4,138,213 
Depreciation of property and equipment    278,746     324,166     976,419     803,737 
Amortization of intangible assets    13,421     11,532     36,485     26,988 
Total cost of revenues  32,426,455   30,475,590   94,383,774   88,736,410 
         
Gross profit  16,637,872   13,792,055   46,630,555   38,248,711 
         
Expenses:        
Sales and marketing (*)    5,479,445     4,517,666     15,174,619     12,548,415 
Technical operations and development (*)    1,270,107     1,101,581     3,445,118     3,405,052 
General and administrative (*)    2,166,217     2,607,917     7,497,752     7,826,405 
Depreciation of property and equipment    178,687     63,790     328,877     185,074 
Amortization of intangible assets    279,126     56,997     613,041     167,209 
Impairment of indefinite life intangible assets    2,866     18,550     27,745     68,848 
Loss (gain) on currency forward contracts    22,475     352,738     (96,993)    681,988 
Total expenses  9,398,923   8,719,239   26,990,159   24,882,991 
         
Income from operations  7,238,949   5,072,816   19,640,396   13,365,720 
         
Other income (expenses):        
Interest expense, net  (135,168)  (78,959)  (301,868)  (161,136)
Other income  130,147   -   387,787   - 
Total other income (expenses)  (5,021)  (78,959)  85,919   (161,136)
         
Income before provision for income taxes  7,233,928   4,993,857   19,726,315   13,204,584 
         
Provision for income taxes  2,492,649   1,834,400   6,476,012   4,926,189 
Net income before redeemable non-controlling interest  4,741,279   3,159,457   13,250,303   8,278,395 
         
Redeemable non-controlling interest    (254,101)    (91,283)    (698,583)    (162,750)
         
Net (earnings) loss attributable to redeemable non-controlling interest    254,101     91,283     698,583     162,750 
         
Net income for the period  4,741,279   3,159,457   13,250,303   8,278,395 
         
Other comprehensive income (loss), net of tax        
Unrealized income (loss) on hedging activities  (58,821)  (724,336)  516,406   (1,723,247)
Net amount reclassified to earnings  131,912   364,330   546,836   1,152,359 
Other comprehensive income (loss) net of tax of 41,580 and $198,664 for the three months ended September 30, 2016 and September 30, 2015 and  $585,943 and 321,879 for the nine months ended September 30, 2016 and September 30, 2015  73,091   (360,006)  1,063,242   (570,888)
         
Comprehensive income, net of tax for the period $  4,814,370  $  2,799,451  $  14,313,545  $  7,707,507 
         
Basic earnings per common share$ 0.45 $ 0.29 $ 1.26 $ 0.75 
         
Shares used in computing basic earnings per common share  10,432,763   10,984,869   10,549,056   11,057,634 
         
Diluted earnings per common share$ 0.45 $ 0.28 $ 1.23 $ 0.72 
         
Shares used in computing diluted earnings per common share  10,619,005   11,372,682   10,736,775   11,469,657 
         
         
         
(*) Stock-based compensation has been included in expenses as follows:        
Network expenses$ 4,920 $ 7,221 $ 16,784 $ 22,264 
Sales and marketing$ 60,832 $ 45,385 $ 176,095 $ 144,408 
Technical operations and development$ 23,512 $ 27,364 $ 74,913 $ 84,646 
General and administrative$ 106,175 $ 48,605 $ 318,062 $ 126,910 
         

 

Tucows Inc.
Consolidated Statements of Cash Flows
(Dollar amounts in U.S. dollars)
         
  Three months ended September 30, Nine months ended September 30,
   2016   2015   2016   2015 
Cash provided by: (unaudited) (unaudited)
Operating activities:        
Net income for the period  $  4,741,279   3,159,457   13,250,303   8,278,395 
Items not involving cash:        
Depreciation of property and equipment  457,433   387,956   1,305,296   988,811 
Amortization of debt discount and issuance costs  8,298   -   8,298   - 
Amortization of intangible assets  292,547   68,529   649,526   194,197 
Impairment of indefinite life intangible asset  2,866   18,550   27,745   68,848 
Deferred income taxes (recovery)  926,733   (53,085)  1,630,076   (1,019,254)
Amortization of deferred rent  13,783   7,370   30,447   17,917 
Disposal of domain names  4,760   2,866   25,581   20,551 
Other income  (128,820)  -   (386,460)  - 
Loss (gain) on change in the fair value of forward contracts  (20,114)  99,052   (292,133)  160,394 
Stock-based compensation  195,439   128,575   585,854   378,228 
Change in non-cash operating working capital:        
Accounts receivable  (1,623,719)  262,149   (4,435,250)  (994,889)
Inventory  (217,741)  (123,047)  (598,658)  (281,491)
Prepaid expenses and deposits  419,939   1,000,287   (939,935)  (892,105)
Prepaid domain name registry and ancillary services fees  (1,271,948)  149,905   (5,170,911)  (2,068,871)
Income taxes recoverable  363,244   1,152,410   1,553,524   1,935,426 
Accounts payable  681,303   195,002   (1,993)  202,578 
Accrued liabilities  (581,495)  406,920   (1,429,069)  1,517,453 
Customer deposits  (943,579)  (199,695)  90,970   253,223 
Deferred revenue  1,666,291   140,850   6,772,663   3,185,946 
Accreditation fees payable  14,059   (20,621)  51,215   11,425 
Net cash provided by operating activities  5,000,558   6,783,430   12,727,089   11,956,782 
         
Financing activities:        
Proceeds received on exercise of stock options  48,376   189,914   107,672   737,369 
Payment of tax obligations resulting from net exercise of stock options  (76,537)  -   (318,770)  - 
Excess tax benefits from share-based compensation expense  268,565   312,091   714,764   1,400,793 
Repurchase of common stock  -   (9,977,495)  (7,180,257)  (18,179,176)
Proceeds received on loan payable  10,989,583   -   16,989,583   3,500,000 
Repayment of  loan payable  (9,062,500)  -   (9,500,000)  - 
Payment of loan payable costs  (383,463)  -   (516,963)  - 
Net cash provided by (used in) financing activities  1,784,024   (9,475,490)  296,029   (12,541,014)
         
Investing activities:        
Additions to property and equipment  (2,091,368)  (710,342)  (3,923,105)  (2,051,124)
Gross proceeds from the waiver of rights to .online registry   -   -   -   6,619,832 
Remaining payment for the acquisition of Ting Virginia, LLC., net of cash of $21,423  -   -   -   (357,493)
Acquisition of intangible assets  (74,400)  -   (6,324,970)  - 
Net cash provided by (used in) investing activities  (2,165,768)  (710,342)  (10,248,075)  4,211,215 
         
Increase in cash and cash equivalents  4,618,814   (3,402,402)  2,775,043   3,626,983 
         
Cash and cash equivalents, beginning of period    5,879,482     15,300,762     7,723,253     8,271,377 
Cash and cash equivalents, end of period$ 10,498,296 $ 11,898,360 $ 10,498,296 $ 11,898,360 
         
Supplemental cash flow information:        
Interest paid$ 93,560   78,988   260,506   175,290 
Income taxes paid, net$ 927,826   512,954   2,507,699   2,457,225 
         
Supplementary disclosure of non-cash investing and financing activities:        
Property and equipment acquired during the period not yet paid for$ 89,860   63,499   89,860   63,499 
         

 

Tucows Inc. 
Reconciliation of Net income to Adjusted EBITDA
(In Thousands of US Dollars) 
         
  Three months ended September 30, Nine months ended September 30,
   2016  2015  2016  2015
  (unaudited) (unaudited)
         
Net income for the period $ 4,741 $3,159$ 13,250 $8,278
Depreciation of property and equipment   457  388  1,305  989
Amortization of intangible assets   293  69  650  194
Impairment of intangible assets  3  19  28  69
Interest expense, net  135  79  302  161
Provision for income taxes   2,493  1,834  6,476  4,926
Stock-based compensation  195  129  586  378
Unrealized loss (gain) on change in fair value of forward contracts  (20) 99  (292) 160
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities  278  24  493  284
         
Adjusted EBITDA$ 8,575 $5,800$ 22,798 $15,439
         

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.


        

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