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Tucows Reports Continuing Strong Financial Results for Second Quarter of 2017

Quarter Highlighted by Solid Year-Over-Year Growth Across All Key Financial Metrics and Record EPS

TORONTO, Aug. 08, 2017 (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 second quarter ended June 30, 2017. All figures are in U.S. dollars.


     
Summary Financial Results
(In Thousands of US Dollars, Except Per Share Data)
     
  3 Months Ended June 30
6 Months Ended June 30
2017
(Unaudited)
2016
(Unaudited)
% Change 2017
(Unaudited)
2016
(Unaudited)
% Change
Net revenue 84,223 47,204 78 % 153,791 91,950 67 %
Net income 5,241 4,071 29 % 7,688 8,509 (10 %)
Basic Net earnings per common share 0.50 0.39 28 % 0.73 0.80 (9 %)
Adjusted EBITDA1,2 10,340 6,905 50 % 16,536 14,222 16 %
Net cash provided by operating activities 8,132 2,558 218 % 10,534 8,173 29 %
                 
  1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table. In the second quarter of 2016, Tucows revised its definition of Adjusted EBITDA as detailed in the description below and the table reconciling Adjusted EBITDA to GAAP net income.
  2. Adjusted EBITDA for the second quarter and first six months of 2017 reflect the impact effect of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Enom acquisition which lowered Adjusted EBITDA by $1.6 million and $5.5 million for the second quarter and first six months of 2017, respectively.
     
Summary of Revenues and Gross Margin
(In Thousands of US Dollars)
     
  Revenue Gross Margin
  3 Months ended
June 30
3 Months ended
June 30
  2017
(Unaudited)
2016
(Unaudited)
2017
(Unaudited)
2016
(Unaudited)
Network Access Services:
Mobile Services 20,379 17,805 9,677   8,425  
Other Services 1,087 964 121   493  
Total Network Access Services 21,466 18,769 9,798   8,918  
         
Domain Services:
Wholesale        
Domain Services 48,550 21,666 6,101   4,028  
Value Added Services 5,576 2,308 4,981   1,849  
Total Wholesale 54,126 23,974 11,082   5,877  
         
Retail 7,663 3,576 3,115   1,913  
Portfolio 968 885 783   704  
Total Domain Services 62,757 28,435 14,980   8,494  
         
Network Expenses:
Network, other costs - - (2,261 ) (1,405 )
Network, depreciation and amortization costs - - (1,170 ) (362 )
Total Network expenses - - (3,431 ) (1,767 )
         
Total revenue/gross margin 84,223 47,204 21,347   15,645  
             

/EIN News/ -- “The second quarter of 2017 saw continued strong performance across all areas of the business our first full quarter following the Enom acquisition in January, which combined to drive year-over-year growth in revenue of 78% to a record $84 million, record earnings per share of $0.50 and cash flow from operations of more than $8.1 million,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc.

“We continue to execute well on each of our strategic initiatives. Our domains team made great progress on the integration of Enom toward significant future synergies and, in fact, exceeded our expectations year to date on organic growth. Our Ting Mobile business continued to add customers on the core base and saw the lowest monthly churn from our core base in two years. Ting Internet continued its steady climb in Charlottesville, ramped significantly in both Westminster, Maryland and Holly Springs, North Carolina  and, most importantly, took meaningful operational steps toward scalability far beyond our existing Ting Towns.”

Financial Results

Net revenue for the second quarter of 2017 increased 78% to $84.2 million from $47.2 million for the second quarter of 2016.

Net income for the second quarter of 2017 increased 29% to 5.2 million, or $0.50 per share, from $4.1 million, or $0.39 per share, for the second quarter of 2016. Adjusted EBITDA1 for the second quarter of 2017 increased 50% to $10.3 million from $6.9 million for the second quarter of 2016.  The increase in EBITDA was largely driven by the acquisition of Enom and to a lesser extent growth in the Company’s Ting Mobile and incumbent Domains business. 

Cash and cash equivalents at the end of the second quarter of 2017  were $15.1 million compared with $15.0 million at the end of the first quarter of 2017 and $5.9 million at the end of the second quarter of 2016.

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, 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 June 30 6 months ended June 30*
  2017
(unaudited)
2016
(unaudited)
2017
(unaudited)
2016
(unaudited)
Net income for the period 5,241   4,071   7,688   8,509  
Depreciation of property and equipment 879   428   1,636   848  
Amortization of intangible assets 2,064   288   3,825   357  
Impairment of intangible assets -   4   -   25  
Interest expense, net 970   121   1,838   167  
Provision for income taxes 1,083   2,078   958   3,983  
Stock-based compensation 313   190   631   390  
Unrealized loss (gain) on change in fair value of forward contracts (20 ) (29 ) (38 ) (272 )
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities (317 ) (246 ) (511 ) 215  
Acquisition and transition costs** 127   -   509   -  
         
Adjusted EBITDA 10,340   6,905   16,536   14,222  
*Adjusted EBITDA amounts presented herein for the six months ended June 30, 2016 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.
 

**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.

During 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 for the three months ended June 30, 2016 and $1.1 million for the six months ended June 30, 2016.

Conference Call
Tucows management will host a conference call today, Tuesday, August 8, 2017 at 5:00 p.m. (ET) to discuss the Company’s second quarter 2017 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 59387346 followed by the pound key. The telephone replay will be available until Tuesday, August 15, 2017 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) and Enom (http://www.enom.com) manage a combined 29 million domain names and millions of value-added services through a global reseller network of over 40,000 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)
           
    June 30,     December 31,
      2017       2016
    (unaudited)     (unaudited)
           
Assets          
           
Current assets:          
Cash and cash equivalents   $ 15,145,979     $ 15,105,075
Accounts receivable     14,260,465       10,925,622
Inventory     2,306,434       1,210,789
Prepaid expenses and deposits     14,914,646       6,250,555
Derivative instrument asset, current portion     573,378       172,888
Prepaid domain name registry and ancillary services fees, current portion     109,526,920       49,396,737
Income taxes recoverable     2,184,634       220,451
Total current assets     158,912,456       83,282,117
           
Prepaid domain name registry and ancillary services fees, long-term portion     24,020,136       10,993,156
Property and equipment     20,405,942       13,450,438
Deferred tax asset     -       5,708,725
Intangible assets     60,432,167       19,973,793
Goodwill     87,486,243       21,005,143
Total assets   $ 351,256,944     $ 154,413,372
           
           
Liabilities and Stockholders' Equity          
           
Current liabilities:          
Accounts payable   $ 6,635,890     $ 4,786,645
Accrued liabilities     7,700,707       7,098,905
Customer deposits     17,208,189       5,418,622
Deferred rent, current portion     20,891       20,854
Loan payable, current portion     18,289,853       2,233,110
Deferred revenue, current portion     133,161,879       62,795,079
Accreditation fees payable, current portion     1,247,213       528,027
Income taxes payable     860,452       1,548,121
Total current liabilities     185,125,074       84,429,363
           
Deferred revenue, long-term portion     31,453,857       15,053,977
Accreditation fees payable, long-term portion     304,475       115,084
Deferred rent, long-term portion     129,649       124,202
Loan payable, long-term portion     67,669,773       8,015,698
Deferred Gain     687,040       944,680
Deferred tax liability     19,650,592       4,827,192
           
Redeemable non-controlling interest     1,111,138       3,086,090
           
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; 10,552,401 shares issued and outstanding as of June 30, 2017 and 10,461,574 shares issued and outstanding as of December 31, 2016     15,125,326       14,460,500
Additional paid-in capital     1,607,476       2,857,921
Retained earnings     28,062,438       20,399,511
Accumulated other comprehensive income     330,106       99,154
Total stockholders' equity     45,125,346       37,817,086
Total liabilities and stockholders' equity   $ 351,256,944     $ 154,413,372
           

 

Tucows  Inc. 
Consolidated Statements of Operations 
(Dollar amounts in U.S. dollars) 
                     
     Three months ended June 30,       Six months ended June 30, 
      2017     2016       2017       2016  
                               
    (unaudited)     (unaudited)
                     
Net revenues $   84,223,301   $ 47,203,913     $ 153,791,363     $ 91,950,003  
                     
Cost of revenues:                    
Cost of revenues     59,445,344     29,792,108       108,756,056       58,598,827  
Network expenses (*)     2,260,566     1,404,826       4,603,762       2,637,757  
Depreciation of property and equipment     714,629     350,920       1,304,976       697,673  
Amortization of intangible assets     455,402     11,532       835,564       23,064  
Total cost of revenues     62,875,941     31,559,386       115,500,358       61,957,321  
                     
Gross profit     21,347,360     15,644,527       38,291,005       29,992,682  
                     
Expenses:                    
Sales and marketing (*)     7,447,225     5,230,118       14,666,547       9,695,174  
Technical operations and development (*)     1,798,097     998,651       3,492,238       2,175,011  
General and administrative (*)     3,286,610     2,926,608       6,743,953       5,331,535  
Depreciation of property and equipment     164,693     76,922       331,010       150,190  
Amortization of intangible assets     1,608,489     276,918       2,989,298       333,915  
Impairment of indefinite life intangible assets     -     3,894       -       24,879  
Loss (gain) on currency forward contracts     (26,776 )   (8,711 )     (61,201 )     (119,468 )
Total expenses     14,278,338     9,504,400       28,161,845       17,591,236  
                     
Income from operations     7,069,022     6,140,127       10,129,160       12,401,446  
                     
Other income (expenses):                    
Interest expense, net     (970,029 )   (120,528 )     (1,838,022 )     (166,699 )
Other income     225,481     128,820       354,378       257,640  
Total other income (expenses)     (744,548 )   8,292       (1,483,644 )     90,941  
                     
Income before provision for income taxes     6,324,474     6,148,419       8,645,516       12,492,387  
                     
Provision for income taxes     1,082,990     2,077,633       957,541       3,983,363  
Net income before redeemable non-controlling interest     5,241,484     4,070,786       7,687,975       8,509,024  
                     
Redeemable non-controlling interest     (117,294 )   (273,690 )     (243,058 )     (444,482 )
                     
Net income attributable to redeemable non-controlling interest     117,294     273,690       243,058       444,482  
Net income for the period     5,241,484     4,070,786       7,687,975       8,509,024  
                     
Other comprehensive income (loss), net of tax                    
Unrealized income (loss) on hedging activities     142,768     27,264       328,997       575,227  
Net amount reclassified to earnings     (17,425 )   79,367       (98,045 )     414,924  
Other comprehensive income (loss) net of tax of $71,303 and $60,659 for the three months ended June 30, 2017 and  June 30, 2016, and $131,382 and $544,363 for the six months ended June 30, 2017 and  June 30, 2016     125,343     106,631       230,952       990,151  
                     
Comprehensive income, net of tax for the period $   5,366,827   $ 4,177,417     $ 7,918,927     $ 9,499,175  
                     
Basic earnings per common share $   0.50   $ 0.39     $ 0.73     $ 0.80  
                     
Shares used in computing basic earnings per common share     10,528,219     10,541,659       10,501,407       10,607,843  
                     
Diluted earnings per common share $   0.49   $ 0.38     $ 0.71     $ 0.79  
                     
Shares used in computing diluted earnings per common share     10,793,031     10,733,860       10,785,685       10,797,458  
                     
                     
                     
(*) Stock-based compensation has been included in expenses as follows:                    
Network expenses $   3,432   $ 5,069     $ 7,815     $ 11,864  
Sales and marketing $   61,049   $ 60,385     $ 120,050     $ 115,263  
Technical operations and development $   57,564   $ 25,003     $ 118,974     $ 51,401  
General and administrative $   191,220   $ 99,730     $ 384,246     $ 211,887  
                     

 

 
Tucows  Inc. 
Consolidated Statements of Cash Flows 
 (Dollar amounts in U.S. dollars) 
                       
     Three months ended June 30,       Six months ended June 30, 
    2017       2016       2017       2016  
                               
Cash provided by:   (unaudited)     (unaudited)
Operating activities:                      
Net income for the period $ 5,241,484     $ 4,070,786     $ 7,687,975     $ 8,509,024  
Items not involving cash:                      
Depreciation of property and equipment   879,322       427,842       1,635,986       847,863  
Loss on write off of property and equipment   8,794       -       8,794       -  
Amortization of debt discount and issuance costs   80,207       -       147,312       -  
Amortization of intangible assets   2,063,891       288,450       3,824,862       356,979  
Impairment of indefinite life intangible asset   -       3,894       -       24,879  
Deferred income taxes   (2,885,373 )     430,184       (1,565,554 )     703,343  
Excess tax benefits on share-based compensation expense   (1,181,754 )     384,839       (2,171,086 )     446,199  
Amortization of deferred rent   1,452       4,749       5,484       16,664  
Loss on disposal of domain names   6,976       12,601       16,765       20,821  
Other income   (128,820 )     (128,820 )     (257,640 )     (257,640 )
Loss (gain) on change in the fair value of forward contracts   (162,813 )     (28,977 )     (300,920 )     (272,019 )
Stock-based compensation   313,265       190,187       631,085       390,415  
Change in non-cash operating working capital:                      
Accounts receivable   (905,691 )     (1,921,021 )     (863,970 )     (2,811,531 )
Inventory   (1,266,641 )     (141,830 )     (1,095,645 )     (380,917 )
Prepaid expenses and deposits   1,186,432       (1,106,950 )     (2,371,076 )     (1,359,874 )
Prepaid domain name registry and ancillary services fees   2,976,254       (3,101,043 )     (2,513,168 )     (3,898,963 )
Income taxes recoverable   2,513,458       (36,174 )     (147,070 )     1,190,280  
Accounts payable   (591,560 )     (1,233,092 )     (4,037,987 )     (683,296 )
Accrued liabilities   (1,817,566 )     (396,328 )     13,356       (847,574 )
Customer deposits   3,151,562       1,214,472       3,067,971       1,034,549  
Deferred revenue   (1,272,963 )     3,597,790       8,967,686       5,106,372  
Accreditation fees payable   (78,203 )     26,537       (149,530 )     37,156  
Net cash provided by operating activities   8,131,713       2,558,096       10,533,630       8,172,730  
                       
Financing activities:                      
Proceeds received on exercise of stock options   84,969       37,209       104,838       56,767  
Payment of tax obligations resulting from net exercise of stock options   (609,307 )     (203,019 )     (1,321,541 )     (239,704 )
Repurchase of common stock   -       (4,999,978 )     -       (7,180,257 )
Proceeds received on loan payable   -       -       86,998,000       6,000,000  
Repayment of loan payable   (4,572,462 )     (218,750 )     (10,830,740 )     (437,500 )
Payment of loan payable costs   (12,579 )     (133,500 )     (603,754 )     (133,500 )
Net cash provided by (used in) financing activities   (5,109,379 )     (5,518,038 )     74,346,803       (1,934,194 )
                       
Investing activities:                      
Additions to property and equipment   (2,909,176 )     -       (6,602,069 )     -  
Gross proceeds from the waiver of rights to .online registry   -       (975,401 )     -       (1,831,737 )
Acquisition of a portion of the minority interest in Ting Virginia, LLC.   -       -       (2,000,000 )     -  
Acquisition of Enom Incorporated, net of cash   -       -       (76,237,460 )     -  
Acquisition of intangible assets   -       (196,024 )     -       (6,250,570 )
Net cash used in investing activities   (2,909,176 )     (1,171,425 )     (84,839,529 )     (8,082,307 )
                       
Increase (decrease) in cash and cash equivalents   113,158       (4,131,367 )     40,904       (1,843,771 )
                       
Cash and cash equivalents, beginning of period   15,032,821       10,010,849       15,105,075       7,723,253  
Cash and cash equivalents, end of period $ 15,145,979     $ 5,879,482     $ 15,145,979     $ 5,879,482  
                       
Supplemental cash flow information:                      
Interest paid $ 974,984     $ 120,566     $ 1,847,629     $ 166,947  
Income taxes paid, net $ 2,662,666     $ 1,274,739     $ 5,005,582     $ 1,591,959  
                       
Supplementary disclosure of non-cash investing and financing activities:                      
Property and equipment acquired during the period not yet paid for $ 232,290     $ 46,632     $ 232,290     $ 46,632  
                       

 

 
Tucows  Inc.  
Reconciliation of Net income to Adjusted EBITDA 
(In Thousands of US Dollars)  
                             
     Three months ended June 30,         Six months ended June 30, 
    2017         2016         2017         2016  
                                     
    (unaudited)       (unaudited)
                             
Net income for the period $ 5,241       $ 4,071       $ 7,688       $ 8,509  
Depreciation of property and equipment   879         428         1,636         848  
Amortization of intangible assets   2,064         288         3,825         357  
Impairment of intangible assets   -         4         -         25  
Interest expense, net   970         121         1,838         167  
Provision for income taxes   1,083         2,078         958         3,983  
Stock-based compensation   313         190         631         390  
Unrealized loss (gain) on change in fair value of forward contracts   (20 )       (29 )       (38 )       (272 )
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities   (317 )       (246 )       (511 )       215  
Acquisition and transition costs1   127         -         509         -  
                             
Adjusted EBITDA $ 10,340       $ 6,905       $ 16,536       $ 14,222  
                             
1Acquisition 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.
                             

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, Ting, OpenSRS, Enom and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

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

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