TC Tucows Inc

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, 2018. All figures are in U.S. dollars.

Summary Financial Results(In Thousands of US Dollars, Except Per Share Data)

	3 Months Ended September 30				9 Months Ended September 30
	2018(Unaudited)	2017(Unaudited)	% Change		2018(Unaudited)	2017(Unaudited)	% Change
Net revenue	83,519	85,008	-2	%	260,401	238,800	9	%
Net income	5,346	3,440	55	%	12,698	11,128	14	%
Basic Net earnings per common share	0.50	0.33	52	%	1.20	1.06	13	%
Adjusted EBITDA1	11,858	9,368	27	%	33,425	26,082	28	%
Net cash provided by operating activities	11,214	7,282	54	%	26,541	17,814	49	%

1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.

Summary of Revenues and Gross Margin(In Thousands of US Dollars)

	Revenue		Gross Margin
	3 Months endedSeptember 30		3 Months endedSeptember 30
	2018(Unaudited)	2017(Unaudited)	2018(Unaudited)		2017(Unaudited)
Network Access Services:
Mobile Services	22,546	21,749	11,147		9,384
Other Services	2,033	1,442	1,161		847
Total Network Access Services	24,579	23,191	12,308		10,231
Domain Services:
Wholesale
Domain Services	45,070	47,770	7,656		5,477
Value Added Services	4,541	4,203	3,734		3,516
Total Wholesale	49,611	51,973	11,390		8,993
Retail	8,731	8,873	4,266		4,262
Portfolio	598	971	450		791
Total Domain Services	58,940	61,817	16,106		14,046
Network Expenses:
Network, other costs	-	-	(2,315	)	(2,461	)
Network, depreciation and amortization costs	-	-	(1,838	)	(1,322	)
Total Network expenses	-	-	(4,153	)	(3,783	)
Total revenue/gross margin	83,519	85,008	24,261		20,494

“Our third quarter results again demonstrate how the consistent performance and cash flow generation of our Domains and Ting Mobile businesses are enabling us to invest in the build out of the Ting Internet footprint for our next phase of outsized growth,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Gross margin contribution expanded in each of our businesses, with Domains benefiting from normalized margins following the Enom acquisition and Network Access benefiting from Ting Mobile’s lower costs, a larger subscriber base and higher usage per subscriber, as we continue to reposition our offering for renewed growth.  Importantly, Ting Internet continues to steadily advance its network builds, grow its number of serviceable addresses, and expand its subscriber base.  We now have five fully active towns where we are installing, activating and supporting customers every day.”

Financial Results

Net revenue for the third quarter of 2018 was $83.5 million compared with $85.0 million for the third quarter of 2018, with the decrease due primarily to acceleration of revenue in the first quarter of 2018 related to the bulk transfer of 2.65 million very low margin domain names, which was partially offset by the continued growth of Ting Mobile and a bulk transfer of 0.2 million very low margin domains names in the third quarter of 2018.  Excluding the impact of these of bulk transfers, net revenue for the third quarter of 2018 increased 3.5% compared to the third quarter of 2017.

Net income for the third quarter of 2018 increased 55% to $5.3 million, or $0.50 per share from $3.4 million, or $0.33 per share, for the third quarter of 2017.

Adjusted EBITDA1 for the third quarter of 2018 increased 27% to $11.9 million from $9.4 million for the third quarter of 2017. 

Cash and cash equivalents at the end of the third quarter of 2018 was $10.8 million compared with $11.2 million at the end of the second quarter of 2018 and $12.5 million at the end of the third quarter of 2017.

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 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
	2018(unaudited)		2017(unaudited)		2018(unaudited)	2017(unaudited)
Net income for the period	5,346		3,440		12,698	11,128
Depreciation of property and equipment	1,445		978		4,007	2,614
Amortization of intangible assets	2,296		2,245		6,953	6,070
Impairment of intangible assets	-		2		-	2
Interest expense, net	914		864		2,761	2,703
Provision for income taxes	1,370		1,823		3,781	2,781
Stock-based compensation	711		203		1,904	834
Unrealized loss (gain) on change in fair value of forward contracts	(35	)	1		7	(37	)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities	(269	)	(427	)	191	(761	)
Acquisition and transition costs*	80		239		1,123	748
Adjusted EBITDA	11,858		9,368		33,425	26,082
*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 CallAs per its new quarterly conference call format initiated last quarter, concurrent with the dissemination of this news release, management’s pre-recorded remarks 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 five days (until Monday, 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 Friday, November 16 at approximately 4:00 p.m. ET.  All questions will receive a response, however, questions of a more specific may be responded to directly.

About TucowsTucows 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 23 million domain names and millions of value-added services through a global reseller network of over 38,000 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,
		2018				2017
		(unaudited)				(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	10,775			$	18,049
Accounts receivable			11,529				12,376
Inventory			3,140				2,944
Prepaid expenses and deposits			14,554				14,186
Prepaid domain name registry and ancillary services fees, current portion			91,590				103,302
Income taxes recoverable			3,109				3,004
Total current assets			134,697				153,861
Prepaid domain name registry and ancillary services fees, long-term portion			19,636				23,701
Property and equipment			40,220				24,620
Contract costs			1,383				-
Intangible assets			51,505				58,414
Goodwill			90,054				90,054
Total assets		$	337,495			$	350,650
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	8,242			$	7,026
Accrued liabilities			6,877				6,412
Customer deposits			11,885				15,255
Derivative instrument liability			62				-
Deferred rent, current portion			21				21
Loan payable, current portion			17,810				18,290
Deferred revenue, current portion			120,459				129,155
Accreditation fees payable, current portion			1,035				1,175
Income taxes payable			1,128				1,226
Total current liabilities			167,519				178,560
Deferred revenue, long-term portion			28,033				31,427
Accreditation fees payable, long-term portion			260				289
Deferred rent, long-term portion			121				130
Loan payable, long-term portion			46,605				58,634
Deferred Gain			258				429
Deferred tax liability			19,265				19,834
Redeemable non-controlling interest			-				1,136
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; 10,615,566 shares issued and outstanding as of September 30, 2018 and 10,583,879 shares issued and outstanding as of December 31, 2017			15,635				15,368
Additional paid-in capital			3,462				2,167
Retained earnings			56,373				42,676
Accumulated other comprehensive income			(36	)			-
Total stockholders' equity			75,434				60,211
Total liabilities and stockholders' equity		$	337,495			$	350,650

 

Tucows  Inc.
Consolidated Statements of Operations
(Dollar amounts in thousands of U.S. dollars)
		Three months ended September 30,						Nine months ended September 30,
		2018			2017			2018			2017
		(unaudited)						(unaudited)
Net revenues	$	83,519		$	85,008		$	260,401		$	238,800
Cost of revenues:
Cost of revenues		55,105			60,731			178,578			169,488
Network expenses (*)		2,315			2,461			7,590			7,064
Depreciation of property and equipment		1,339			823			3,698			2,128
Amortization of intangible assets		499			499			1,497			1,335
Total cost of revenues		59,258			64,514			191,363			180,015
Gross profit		24,261			20,494			69,038			58,785
Expenses:
Sales and marketing (*)		8,412			7,384			24,629			22,051
Technical operations and development (*)		2,207			1,910			6,657			5,402
General and administrative (*)		4,120			3,381			12,906			10,124
Depreciation of property and equipment		106			155			309			486
Amortization of intangible assets		1,797			1,746			5,456			4,735
Impairment of indefinite life intangible assets		-			2			-			2
Loss (gain) on currency forward contracts		(27	)		(54	)		22			(115	)
Total expenses		16,615			14,524			49,979			42,685
Income from operations		7,646			5,970			19,059			16,100
Other income (expenses):
Interest expense, net		(914	)		(864	)		(2,761	)		(2,703	)
Other income, net		(16	)		157			181			512
Total other income (expenses)		(930	)		(707	)		(2,580	)		(2,191	)
Income before provision for income taxes		6,716			5,263			16,479			13,909
Provision for income taxes		1,370			1,823			3,781			2,781
Net income before redeemable non-controlling interest		5,346			3,440			12,698			11,128
Redeemable non-controlling interest		-			(69	)		(26	)		(312	)
Net income attributable to redeemable non-controlling interest		-			69			26			312
Net income for the period		5,346			3,440			12,698			11,128
Other comprehensive income, net of tax
Unrealized income (loss) on hedging activities		144			309			(112	)		638
Net amount reclassified to earnings		63			(318	)		76			(416	)
Other comprehensive income (loss) net of tax of $ (59) and $ 5 for the three months ended September 30, 2018 and  September 30, 2017, $ 19 and $ (127) for the nine months ended September 30, 2018 and  September 30, 2017		207			(9	)		(36	)		222
Comprehensive income, net of tax for the period	$	5,553		$	3,431		$	12,662		$	11,350
Basic earnings per common share	$	0.50		$	0.33		$	1.20		$	1.06
Shares used in computing basic earnings per common share		10,611,579			10,564,311			10,599,243			10,522,841
Diluted earnings per common share	$	0.50		$	0.32		$	1.18		$	1.03
Shares used in computing diluted earnings per common share		10,794,297			10,785,342			10,795,668			10,785,050
(*) Stock-based compensation has been included in expenses as follows:
Network expenses	$	70		$	52		$	153		$	60
Sales and marketing	$	307		$	197		$	739		$	318
Technical operations and development	$	150		$	96		$	501		$	215
General and administrative	$	184		$	(143	)	$	511		$	241

 

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,
		2018			2017			2018			2017
Cash provided by:		(unaudited)						(unaudited)
Operating activities:
Net income for the period	$	5,346		$	3,440		$	12,698		$	11,128
Items not involving cash:
Depreciation of property and equipment		1,445			978			4,007			2,614
Loss on write off of property and equipment		-			8			-			17
Amortization of debt discount and issuance costs		72			57			211			204
Amortization of intangible assets		2,296			2,245			6,953			6,070
Impairment of indefinite life intangible asset		-			2			-			2
Change in capitalized contract costs		(29	)		-			21			-
Deferred income taxes (recovery)		(369	)		(1,445	)		(861	)		(3,011	)
Excess tax benefits on share-based compensation expense		(191	)		(444	)		(532	)		(2,615	)
Amortization of deferred rent		(5	)		-			(9	)		6
Loss on disposal of domain names		5			8			70			25
Other income		-			(129	)		(171	)		(386	)
Loss (gain) on change in the fair value of forward contracts		(30	)		1			13			(37	)
Stock-based compensation		711			203			1,904			834
Change in non-cash operating working capital:
Accounts receivable		685			533			847			(332	)
Inventory		108			(643	)		(196	)		(1,739	)
Prepaid expenses and deposits		874			202			(368	)		(2,169	)
Prepaid domain name registry and ancillary services fees		4,229			3,084			15,777			570
Income taxes recoverable		(137	)		2,225			293			1,815
Accounts payable		778			(644	)		1,048			(4,682	)
Accrued liabilities		107			981			465			994
Customer deposits		(1,049	)		(1,905	)		(3,370	)		1,163
Deferred revenue		(3,559	)		(1,425	)		(12,090	)		7,543
Accreditation fees payable		(73	)		(50	)		(169	)		(200	)
Net cash provided by operating activities		11,214			7,282			26,541			17,814
Financing activities:
Proceeds received on exercise of stock options		23			68			62			173
Payment of tax obligations resulting from net exercise of stock options		(116	)		(117	)		(404	)		(1,438	)
Proceeds received on loan payable		-			-			2,500			86,998
Repayment of loan payable		(4,387	)		(4,573	)		(15,212	)		(15,403	)
Payment of loan payable costs		(4	)		(16	)		(8	)		(620	)
Net cash (used in) provided by financing activities		(4,484	)		(4,638	)		(13,062	)		69,710
Investing activities:
Additions to property and equipment		(7,003	)		(2,859	)		(19,439	)		(9,461	)
Acquisition of a portion of the minority interest in Ting Virginia, LLC		-			-			(1,200	)		(2,000	)
Acquisition of Enom Incorporated, net of cash		-			-			-			(76,237	)
Acquisition of intangible assets		(113	)		(2,384	)		(114	)		(2,384	)
Net cash used in investing activities		(7,116	)		(5,243	)		(20,753	)		(90,082	)
Decrease in cash and cash equivalents		(386	)		(2,599	)		(7,274	)		(2,558	)
Cash and cash equivalents, beginning of period		11,161			15,146			18,049			15,105
Cash and cash equivalents, end of period	$	10,775		$	12,547		$	10,775		$	12,547
Supplemental cash flow information:
Interest paid	$	919		$	870		$	2,781		$	2,717
Income taxes paid, net	$	1,793		$	1,308		$	5,370		$	6,313
Supplementary disclosure of non-cash investing and financing activities:
Property and equipment acquired during the period not yet paid for	$	382		$	186		$	382		$	186

Reconciliation of Net income to Adjusted EBITDA
(In Thousands of US Dollars)
(unaudited)
		Three months ended September 30,						Nine months ended September 30,
		2018 (unaudited)			2017 (unaudited)			2018 (unaudited)		2017 (unaudited)
Net income for the period	$	5,346		$	3,440			12,698	$	11,128
Depreciation of property and equipment		1,445			978			4,007		2,614
Amortization of intangible assets		2,296			2,245			6,953		6,070
Impairment of intangible assets		-			2			-		2
Interest expense, net		914			864			2,761		2,703
Provision for income taxes		1,370			1,823			3,781		2,781
Stock-based compensation		711			203			1,904		834
Unrealized loss (gain) on change in fair value of forward contracts		(35	)		1			7		(37	)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities		(269	)		(427	)		191		(761	)
Acquisition and other costs1		80			239			1,123		748
Adjusted EBITDA	$	11,858		$	9,368			33,425	$	26,082
1Acquisition 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. 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 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 and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

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