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Tucows Reports Continuing Strong Financial Results for Third Quarter of 2016

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.

Lawrence Chamberlain NATIONAL Equicom (416) 848-1457 lchamberlain@national.ca

Source:Tucows Inc