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 first quarter ended March 31, 2019. All figures are in U.S. dollars.

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

	3 Months Ended March 31
	2019(Unaudited)	2018(Unaudited)	% Change
Net revenue1,2	78,953	95,795	-18%
Net income	2,799	3,744	-25%
Basic Net earnings per common share3	0.26	0.35	-26%
Adjusted EBITDA3,4	9,431	10,378	-9%
Net cash provided by operating activities	8,991	9,573	-6%

1. Tucows first quarter 2019 results include 13 days of contribution of Ascio Technologies (“Ascio”), which the Company acquired on March 18, 2019.
2. Net revenue for the first quarter of 2018 included the recognition of $14.6 million in accelerated revenue related to the bulk transfer of nearly 2.65 million very low-margin domain names during that period.
3. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
4. Adjusted EBITDA for the first quarter of 2019 reflects the impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Ascio acquisition on March 18, 2019, which lowered Adjusted EBITDA by $0.2 million.

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

	Revenue		Gross profit
	3 Months endedMarch 31		3 Months endedMarch 31
	2019(Unaudited)	2018(Unaudited)	2019(Unaudited)	2018(Unaudited)
Network Access Services:
Mobile Services	20,809	21,872	10,066	10,606
Other Services	2,443	1,736	1,374	795
Total Network Access Services	23,252	23,608	11,440	11,401
Domain Services:
Wholesale
Domain Services	42,591	58,428	7,752	7,114
Value Added Services	4,184	4,434	3,390	3,577
Total Wholesale	46,775	62,862	11,142	10,691
Retail	8,642	8,436	4,283	4,027
Portfolio	284	889	156	704
Total Domain Services	55,701	72,187	15,581	15,422
Network Expenses:
Network, other costs	-	-	(2,395)	(2,574)
Network, depreciation and amortization costs	-	-	(1,975)	(1,630)
Total Network expenses	-	-	(4,370)	(4,204)
Total	78,953	95,795	22,651	22,619

“Our Domain Services and Ting Mobile businesses continue to generate strong cash flows to support our investment in our outsized Ting Internet opportunity,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc.  “During the first quarter, we saw continuing steady progress on Ting Internet, as we further expanded our networks, increased the number of serviceable addresses, and grew our subscriber base. We also added our seventh town, Wake Forest, North Carolina, followed shortly thereafter by our eighth, Fullerton, California, just after quarter end.  Our solid start to the year positions Tucows for improved growth in 2019 and beyond.”

Financial Results

Net revenue for the first quarter of 2019 was $79.0 million compared with $95.8 million for the first quarter of 2018, with the first quarter of 2018 benefitting from accelerated revenue recognition of $14.6 million related to a bulk transfer of 2.65 million domain names during that period.  Excluding the impact of the accelerated revenue, net revenue for the first quarter of 2019 decreased 3% compared to the first quarter of 2018.

Net income for the first quarter of 2019 was $2.8 million, or $0.26 per share, compared with $3.7 million, or $0.35 per share, for the first quarter of 2018.

Adjusted EBITDA5 for the first quarter of 2019 was $9.4 million compared with $10.4 million for the first quarter of 2018.  Adjusted EBITDA for the first quarter 2019 reflects the impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Ascio acquisition, which lowered Adjusted EBITDA by $0.2 million.  The estimated impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue on Adjusted EBITDA is approximately $3.0 million, the majority of which will be reflected in our 2019 financial results. 

Cash and cash equivalents at the end of the first quarter of 2019 were $11.0 million compared with $12.6 million at the end of the fourth quarter of 2018 and $16.6 million at the end of the first quarter of 2018.

Notes:

5. 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 transition 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 March 31
	2019 (unaudited)	2018 (unaudited)
Net income for the period	2,799	3,744
Depreciation of property and equipment	1,925	1,232
Amortization of intangible assets	2,040	2,331
Interest expense, net	972	896
Provision for income taxes	1,257	1,183
Stock-based compensation	525	578
Unrealized loss (gain) on change in fair value of forward contracts	(118)	(3)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities	(328)	176
Acquisition and transition costs*	359	241
Adjusted EBITDA	9,431	10,378
*Acquisition and other costs represent transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to the Company’s acquisition of Enom in January 2017 and Ascio in March 2019.  Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.

Conference CallConcurrent 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 six days (until Tuesday, May 14), 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 Tuesday, May 21 at approximately 4:00 p.m. ET.  All questions will receive a response, however, questions of a more specific nature 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), Enom (http://www.enom.com) and Ascio (http://ascio.com) manage a combined 25 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)
		March 31,				December 31,
			2019			2018*
		(unaudited)				(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	11,035			$	12,637
Accounts receivable			13,120				10,837
Inventory			3,367				3,775
Prepaid expenses and deposits			16,498				15,472
Prepaid domain name registry and ancillary services fees, current portion			99,962				87,782
Income taxes recoverable			2,048				1,423
Total current assets			146,030				131,926
Prepaid domain name registry and ancillary services fees, long-term portion			18,599				18,745
Property and equipment			55,486				48,065
Right of use operating lease			12,206				-
Contract costs			1,371				1,390
Intangible assets			61,991				49,395
Goodwill			109,777				90,054
Total assets		$	405,460			$	339,575
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	8,459			$	8,445
Accrued liabilities			8,055				5,899
Customer deposits			14,571				11,919
Derivative instrument liability			353				1,276
Deferred rent, current portion			-				21
Operating lease liability, current portion			1,917				-
Loan payable, current portion			24,788				18,400
Deferred revenue, current portion			131,801				116,734
Accreditation fees payable, current portion			1,076				985
Income taxes payable			702				1,668
Total current liabilities			191,722				165,347
Deferred revenue, long-term portion			27,618				26,960
Accreditation fees payable, long-term portion			239				250
Deferred rent, long-term portion			-				116
Operating lease liability, long-term portion			9,793				-
Loan payable, long-term portion			68,026				46,201
Deferred Gain			-				-
Deferred tax liability			24,621				20,925
Redeemable non-controlling interest			-				-
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; 10,643,750 shares issued and outstanding as of March 31, 2019 and 10,627,988 shares issued and outstanding as of December 31, 2018			16,188				15,823
Additional paid-in capital			3,844				3,953
Retained earnings			63,609				60,810
Accumulated other comprehensive income			(200	)			(810	)
Total stockholders' equity			83,441				79,776
Total liabilities and stockholders' equity		$	405,460			$	339,575
*The Company has initially applied ASC 2016-02 (Topic 842) using the modified retrospective method. Under this method, the comparative information is not restated.

 

Tucows  Inc.Consolidated Statements of Operations and Comprehensive Income(Dollar amounts in thousands of U.S. dollars)
		Three months ended March 31,
		2019			20181
		(unaudited)
Net revenues	$	78,953		$	95,795
Cost of revenues:
Cost of revenues		51,932			68,972
Network expenses (*)		2,395			2,574
Depreciation of property and equipment		1,801			1,131
Amortization of intangible assets		174			499
Total cost of revenues		56,302			73,176
Gross profit		22,651			22,619
Expenses:
Sales and marketing (*)		8,741			8,365
Technical operations and development (*)		2,523			2,095
General and administrative (*)		4,448			4,530
Depreciation of property and equipment		124			101
Amortization of intangible assets		1,866			1,832
Loss (gain) on currency forward contracts		(79	)		(3	)
Total expenses		17,623			16,920
Income from operations		5,028			5,699
Other income (expenses):
Interest expense, net		(972	)		(896	)
Other income, net		-			124
Total other income (expenses)		(972	)		(772	)
Income before provision for income taxes		4,056			4,927
Provision for income taxes		1,257			1,183
Net income before redeemable non-controlling interest		2,799			3,744
Redeemable non-controlling interest		-			(26	)
Net income attributable to redeemable non-controlling interest		-			26
Net income for the period		2,799			3,744
Other comprehensive income, net of tax
Unrealized income (loss) on hedging activities		549			17
Net amount reclassified to earnings		61			-
Other comprehensive income (loss) net of tax of $ (194) and $ (6) for the three months ended March 31, 2019 and  March 31, 2018		610			17
Comprehensive income, net of tax for the period	$	3,409		$	3,761
Basic earnings per common share	$	0.26		$	0.35
Shares used in computing basic earnings per common share		10,634,842			10,588,718
Diluted earnings per common share	$	0.26		$	0.35
Shares used in computing diluted earnings per common share		10,835,897			10,792,613
(*) Stock-based compensation has been included in expenses as follows:
Network expenses	$	57		$	56
Sales and marketing	$	196		$	188
Technical operations and development	$	117		$	177
General and administrative	$	155		$	159
1The Company has initially applied ASC 2016-02 (Topic 842) using the modified retrospective method. Under this method, the comparative information is not restated.

 

Tucows  Inc. Consolidated Statements of Cash Flows(Dollar amounts in thousands of U.S. dollars)
		Three months ended March 31,
		2019			2018*
Cash provided by:		(unaudited)
Operating activities:
Net income for the period	$	2,799		$	3,744
Items not involving cash:
Depreciation of property and equipment		1,925			1,232
Loss on write off of property and equipment		22			-
Amortization of debt discount and issuance costs		78			70
Amortization of intangible assets		2,040			2,331
Net amortization contract costs		19			25
Deferred income taxes (recovery)		462			(47	)
Excess tax benefits on share-based compensation expense		(356	)		(144	)
Net Right of use operating assets/Operating lease liability		(30	)		-
Loss on disposal of domain names		4			37
Other income		-			(129	)
Loss (gain) on change in the fair value of forward contracts		(118	)		(3	)
Stock-based compensation		525			578
Change in non-cash operating working capital:
Accounts receivable		(1,188	)		(309	)
Inventory		408			46
Prepaid expenses and deposits		(390	)		(525	)
Prepaid domain name registry and ancillary services fees		(1,716	)		11,344
Income taxes recoverable		(1,236	)		265
Accounts payable		786			2,132
Accrued liabilities		1,321			759
Customer deposits		287			(2,275	)
Deferred revenue		3,269			(9,598	)
Accreditation fees payable		80			40
Net cash provided by operating activities		8,991			9,573
Financing activities:
Proceeds received on exercise of stock options		72			7
Payment of tax obligations resulting from net exercise of stock options		(339	)		(147	)
Proceeds received on loan payable		32,940			-
Repayment of loan payable		(4,600	)		(4,572	)
Payment of loan payable costs		(207	)		(4	)
Net cash (used in) provided by financing activities		27,866			(4,716	)
Investing activities:
Additions to property and equipment		(10,435	)		(5,117	)
Acquisition of a portion of the minority interest in Ting Virginia, LLC		-			(1,200	)
Acquisition of Ascio Technologies Inc. (net of cash of $1,437)		(28,024	)		-
Acquisition of intangible assets		-			(1	)
Net cash used in investing activities		(38,459	)		(6,318	)
(Decrease) increase in cash and cash equivalents		(1,602	)		(1,461	)
Cash and cash equivalents, beginning of period		12,637			18,049
Cash and cash equivalents, end of period	$	11,035		$	16,588
Supplemental cash flow information:
Interest paid	$	976		$	901
Income taxes paid, net	$	2,118		$	1,337
Supplementary disclosure of non-cash investing and financing activities:
Property and equipment acquired during the period not yet paid for	$	392		$	398
*The Company has initially applied ASC 2016-02 (Topic 842) using the modified retrospective method. Under this method, the comparative information is not restated.

 

Reconciliation of Net income to Adjusted EBITDA
(In Thousands of US Dollars)
(unaudited)
		Three months ended March 31,
		2019 (unaudited)			2018 (unaudited)
Net income for the period	$	2,799		$	3,744
Depreciation of property and equipment		1,925			1,232
Amortization of intangible assets		2,040			2,331
Interest expense, net		972			896
Provision for income taxes		1,257			1,183
Stock-based compensation		525			578
Unrealized loss (gain) on change in fair value of forward contracts		(118	)		(3	)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities		(328	)		176
Acquisition and other costs1		359			241
Adjusted EBITDA	$	9,431		$	10,378
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 and Ascio in March 2019. 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 expectations 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, Ascio and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

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