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, 2019. 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
	2019(Unaudited)	2018(Unaudited)	%Change		2019(Unaudited)	2018(Unaudited)	%Change
Net revenue	88,129	83,519	6%		251,199	260,401	-4%
Net income	4,205	5,346	-21%		9,620	12,699	-24%
Basic Net earnings per common share	0.40	0.50	-20%		0.90	1.20	-25%
Adjusted EBITDA1,2	14,832	11,858	25%		35,749	33,425	7%
Net cash provided by operating activities	11,215	11,214	0%		27,185	26,541	2%

1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
2. Adjusted EBITDA for the three and first nine months of 2019 reflect 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 $0.9 million and $1.9 million, respectively.

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

	Revenue		Gross Profit
	3 Months ended September 30		3 Months ended September 30
	2019(Unaudited)	2018(Unaudited)	2019(Unaudited)	2018(Unaudited)
Network Access Services:
Mobile Services	21,722	22,546	10,551	11,147
Other Services	2,890	2,033	1,954	1,161
Total Network Access Services	24,612	24,579	12,505	12,308
Domain Services:
Wholesale
Domain Services	47,259	45,071	8,922	7,657
Value Added Services	5,154	4,540	4,381	3,733
Total Wholesale	52,413	49,611	13,303	11,390
Retail	8,713	8,731	4,354	4,266
Portfolio	2,391	598	2,211	450
Total Domain Services	63,517	58,940	19,868	16,106
Network Expenses:
Network, other costs	-	-	(2,254)	(2,315)
Network, depreciation and amortization costs	-	-	(2,545)	(1,838)
Total Network expenses	-	-	(4,799)	(4,153)
Total	88,129	83,519	27,574	24,261

“The third quarter was highlighted by solid financial performance, with year-over-year growth in revenue, gross margin and adjusted EBITDA, as we continued to execute on our strategic priorities in each component of the business,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Our Domains and Ting Mobile businesses continue to generate strong cash flows to support our outsized Ting Internet growth opportunity, where we saw another quarter of steady progress -- further expanding both our projected potential serviceable addresses and serviceable addresses completed, while continuing to add new customers.”

Financial Results

Net revenue for the third quarter of 2019 increased 6% to $88.1 million from $83.5 million for the third quarter of 2018.

Net income for the third quarter of 2019 decreased 21% to $4.2 million, or $0.40 per share from $5.3 million, or $0.50 per share, for the third quarter of 2018.

Adjusted EBITDA1 for the third quarter of 2019 increased 25% to $14.8 million from $11.8 million for the third quarter of 2018. Adjusted EBITDA for the third 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, which lowered Adjusted EBITDA by $0.9 million.

Cash and cash equivalents at the end of the third quarter of 2019 were $12.0 million compared with $12.0 million at the end of the second quarter of 2019 and $10.8 million at the end of the third quarter of 2018.

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 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 endedSeptember 30		9 months endedSeptember 30
	2019(unaudited)	2018(unaudited)	2019(unaudited)	2018(unaudited)
Net income for the period	4,205	5,346	9,620	12,699
Depreciation of property and equipment	2,348	1,445	6,445	4,006
Loss on disposition of property and equipment	73	-	73	-
Amortization of intangible assets	2,858	2,296	7,463	6,953
Interest expense, net	1,263	914	3,549	2,761
Provision for income taxes	3,133	1,370	6,209	3,781
Stock-based compensation	830	711	2,040	1,904
Unrealized loss (gain) on change in fair value of forward contracts	(16)	(35)	(204)	7
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities	88	(269)	(402)	191
Acquisition and transition costs*	50	80	956	1,123
Adjusted EBITDA	14,832	11,858	35,749	33,425
*Acquisition and other costs represents 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 commentary 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, 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 Thursday, November 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) combined manage approximately 24 million domain names and millions of value-added services through a global reseller network of over 37,000 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,
		2019				2018 *
		(unaudited)				(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	11,989			$	12,637
Accounts receivable			13,351				10,837
Inventory			3,903				3,775
Prepaid expenses and deposits			19,717				15,472
Derivative instrument asset, current portion			-				-
Prepaid domain name registry and ancillary services fees, current portion			95,614				87,782
Other assets			-				-
Income taxes recoverable			2,532				1,423
Total current assets			147,106				131,926
Prepaid domain name registry and ancillary services fees, long-term portion			17,477				18,745
Property and equipment			72,167				48,065
Right of use operating lease asset			11,028				-
Contract costs			1,398				1,390
Intangible assets			60,066				49,395
Goodwill			110,100				90,054
Total assets		$	419,342			$	339,575
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	5,440			$	8,445
Accrued liabilities			14,445				5,899
Customer deposits			14,920				11,919
Derivative instrument liability			41				1,276
Deferred rent, current portion			-				21
Operating lease liability, current portion			1,450				-
Loan payable, current portion			-				18,400
Deferred revenue, current portion			128,138				116,734
Accreditation fees payable, current portion			977				985
Income taxes payable			689				1,668
Total current liabilities			166,100				165,347
Deferred revenue, long-term portion			26,003				26,960
Accreditation fees payable, long-term portion			224				250
Deferred rent, long-term portion			-				116
Operating lease liability, long-term portion			9,107				-
Loan payable, long-term portion			104,968				46,201
Deferred Gain			-				-
Deferred tax liability			25,941				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; 10,572,069 shares issued and outstanding as of September 30, 2019 and 10,627,988 shares issued and outstanding as of December 31, 2018			16,492				15,823
Additional paid-in capital			106				3,953
Retained earnings			70,430				60,810
Accumulated other comprehensive income (loss)			(29	)			(810	)
Total stockholders' equity			86,999				79,776
Total liabilities and stockholders' equity		$	419,342			$	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 September 30,							Nine months ended September 30,
		2019			2018 *			2019			2018 *
	(unaudited)							(unaudited)
Net revenues	$	88,129		$	83,519		$	251,199		$	260,401
Cost of revenues:
Cost of revenues		55,756			55,105			162,561			178,578
Network expenses (*)		2,254			2,315			7,034			7,590
Depreciation of property and equipment		2,231			1,339			6,070			3,697
Amortization of intangible assets		314			499			802			1,497
Total cost of revenues		60,555			59,258			176,467			191,362
Gross profit		27,574			24,261			74,732			69,039
Expenses:
Sales and marketing (*)		8,769			8,412			26,366			24,629
Technical operations and development (*)		2,876			2,207			8,151			6,657
General and administrative (*)		4,574			4,120			13,818			12,906
Depreciation of property and equipment		117			106			375			309
Loss on disposition of property and equipment		73			-			73			-
Amortization of intangible assets		2,544			1,797			6,661			5,456
Loss (gain) on currency forward contracts		20			(27	)		(90	)		22
Total expenses		18,973			16,615			55,354			49,979
Income from operations		8,601			7,646			19,378			19,060
Other income (expenses):
Interest expense, net		(1,263	)		(914	)		(3,549	)		(2,761	)
Other income, net		-			(16	)		-			181
Total other income (expenses)		(1,263	)		(930	)		(3,549	)		(2,580	)
Income before provision for income taxes		7,338			6,716			15,829			16,480
Provision for income taxes		3,133			1,370			6,209			3,781
Net income before redeemable non-controlling interest		4,205			5,346			9,620			12,699
Redeemable non-controlling interest		-			-			-			(26	)
Net income attributable to redeemable non-controlling interest		-			-			-			26
Net income for the period		4,205			5,346			9,620			12,699
Other comprehensive income, net of tax
Unrealized income (loss) on hedging activities		(175	)		144			614			(112	)
Net amount reclassified to earnings		26			63			167			76
Other comprehensive income (loss) net of tax (expense) recovery of $47 and ($59) for the three months ended September 30, 2019 and September 30, 2018, ($250) and $19 for the nine months ended September 30, 2019 and September 30, 2018 (note 5)		(149	)		207			781			(36	)
Comprehensive income, net of tax for the period	$	4,056		$	5,553		$	10,401		$	12,663
Basic earnings per common share	$	0.40		$	0.50		$	0.90		$	1.20
Shares used in computing basic earnings per common share		10,626,754			10,611,579			10,639,544			10,599,243
Diluted earnings per common share	$	0.39		$	0.50		$	0.89		$	1.18
Shares used in computing diluted earnings per common share		10,745,834			10,794,297			10,798,099			10,795,668
(*) Stock-based compensation has been included in expenses as follows:
Network expenses	$	95		$	70		$	224		$	153
Sales and marketing	$	363		$	307		$	857		$	739
Technical operations and development	$	179		$	150		$	428		$	501
General and administrative	$	193		$	184		$	531		$	511
*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 Cash Flows
(Dollar amounts in thousands of U.S. dollars)
	Three months ended September 30,							Nine months ended September 30,
		2019			2018 *			2019			2018 *
Cash provided by:		(unaudited)						(unaudited)
Operating activities:
Net income for the period	$	4,205		$	5,346		$	9,620		$	12,699
Items not involving cash:
Depreciation of property and equipment		2,348			1,445			6,445			4,006
Loss on write off of property and equipment		120			-			142			-
Amortization of debt discount and issuance costs		64			72			232			211
Amortization of intangible assets		2,858			2,296			7,463			6,953
Net amortization contract costs		(61	)		(29	)		(8	)		21
Deferred income taxes (recovery)		(170	)		(369	)		1,741			(861	)
Excess tax benefits on share-based compensation expense		(53	)		(191	)		(790	)		(532	)
Amortization of deferred rent		-			(5	)		-			(9	)
Net Right of use operating assets/Operating lease liability		(54	)		-			(5	)		-
Loss on disposal of domain names		66			5			72			70
Other income		-			-			-			(171	)
Loss (gain) on change in the fair value of forward contracts		(16	)		(30	)		(204	)		13
Stock-based compensation		830			711			2,040			1,904
Change in non-cash operating working capital:
Accounts receivable		(1,763	)		685			(1,920	)		847
Inventory		(644	)		108			(128	)		(196	)
Prepaid expenses and deposits		(329	)		874			(3,243	)		(368	)
Prepaid domain name registry and ancillary services fees		3,819			4,229			3,754			15,777
Income taxes recoverable		1,576			(137	)		(1,299	)		293
Accounts payable		(2,394	)		778			(2,778	)		1,048
Accrued liabilities		3,687			107			7,274			465
Customer deposits		1,394			(1,049	)		873			(3,370	)
Deferred revenue		(4,200	)		(3,559	)		(2,062	)		(12,090	)
Accreditation fees payable		(68	)		(73	)		(34	)		(169	)
Net cash provided by operating activities		11,215			11,214			27,185			26,541
Financing activities:
Proceeds received on exercise of stock options		118			23			312			62
Payment of tax obligations resulting from net exercise of stock options		(20	)		(116	)		(544	)		(404	)
Repurchase of common stock		(4,986	)		-			(4,986	)		-
Proceeds received on loan payable		5,000			-			45,371			2,500
Repayment of loan payable		3			(4,387	)		(4,600	)		(15,212	)
Payment of loan payable costs		2			(4	)		(639	)		(8	)
Net cash (used in) provided by financing activities		117			(4,484	)		34,914			(13,062	)
Investing activities:
Additions to property and equipment		(10,308	)		(7,003	)		(31,157	)		(19,439	)
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		(1,038	)		(113	)		(3,566	)		(114	)
Net cash used in investing activities		(11,346	)		(7,116	)		(62,747	)		(20,753	)
(Decrease) increase in cash and cash equivalents		(14	)		(386	)		(648	)		(7,274	)
Cash and cash equivalents, beginning of period		12,003			11,161			12,637			18,049
Cash and cash equivalents, end of period	$	11,989		$	10,775		$	11,989		$	10,775
Supplemental cash flow information:
Interest paid	$	1,267		$	919		$	3,561		$	2,781
Income taxes paid, net	$	1,959		$	1,793		$	6,123		$	5,370
Supplementary disclosure of non-cash investing and financing activities:
Property and equipment acquired during the period not yet paid for	$	991		$	382		$	991		$	382
Acquisition of intangible assets transferred from other assets	$	2,501		$	-		$	-		$	-
*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 U.S. Dollars)		Three months ended September 30,						Nine months ended September 30,
(unaudited)		2019(unaudited)			2018(unaudited)			2019(unaudited)			2018(unaudited)
Net income for the period	$	4,205		$	5,346		$	9,620		$	12,699
Depreciation of property and equipment		2,348			1,445			6,445			4,006
Loss on disposition of property and equipment		73			-			73			-
Amortization of intangible assets		2,858			2,296			7,463			6,953
Interest expense, net		1,263			914			3,549			2,761
Provision for income taxes		3,133			1,370			6,209			3,781
Stock-based compensation		830			711			2,040			1,904
Unrealized loss (gain) on change in fair value of forward contracts		(16	)		(35	)		(204	)		7
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities		88			(269	)		(402	)		191
Acquisition and other costs1		50			80			956			1,123
Adjusted EBITDA	$	14,832		$	11,858		$	35,749		$	33,425
1 Acquisition 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 Chamberlain(416) 519-4196 | lawrence.chamberlain@loderockadvisors.com