Tucows Reports Continuing Strong Financial Results for Fourth Quarter of 2016

Solid Financial Performance in Fourth Quarter Contributes to Record EPS for 2016 of $1.53

TORONTO, Feb. 07, 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 fourth quarter ended December 31, 2016. All figures are in U.S. dollars.

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

	3 Months Ended December 31				12 Months Ended December 31
	2016 (Unaudited)	2015 (Unaudited)	% Change		2016 (Unaudited)	2015	% Change
Net revenue	48,805	44,707	9	%	189,819	171,687	11	%
Net income	2,817	3,095	(9	%)	16,067	11,374	41	%
Basic Net earnings per common share	0.27	0.29	(7	%)	1.53	1.04	47	%
Adjusted EBITDA¹	7,333	5,508	33	%	30,130	20,948	44	%
Net cash provided by operating activities	8,923	1,389	542	%	21,650	13,346	62	%

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)

	Revenue		Gross Margin
	3 Months ended December 31		3 Months ended December 31
	2016 (Unaudited)	2015 (Unaudited)	2016 (Unaudited)	2015 (Unaudited)
Network Access Services:
Mobile Services	17,839	16,054	8,951	7,342
Other Services	919	939	254	488
Total Network Access Services	18,758	16,993	9,205	7,830

Domain Services:
Wholesale
Domain Services	23,130	21,352	4,398	3,492
Value Added Services	2,336	2,304	1,819	1,805
Total Wholesale	25,466	23,656	6,217	5,297

Retail	3,882	3,359	2,086	1,849
Portfolio	698	699	555	517
Total Domain Services	30,046	27,714	8,858	7,664

Network Expenses:
Network, other costs	─	─	(1,285)	(1,327)
Network, depreciation and amortization costs	─	─	(355)	(353)
Total Network expenses	─	─	(1,640)	(1,680)

Total revenue/gross margin	48,805	44,707	16,423	13,814

“A strong fourth quarter contributed to a record financial performance for 2016, driven by continued top line and gross margin growth in both our Ting Mobile and Domain Services businesses as we continue to benefit from the significant operating leverage in our business,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Revenue for fourth quarter grew 9% year-over year to just under $49 million, and for the year grew 11% to just under $190 million. Earnings per share for the quarter decreased 7% year-over-year to $0.27 while growing 47% for the full year to $1.53.”

“As importantly, each of our businesses contributed just what we would have hoped to the overall business strategy,” added Mr. Noss. “Domain Services achieved greater scale and efficiency with the acquisition and successful integration of Melbourne IT’s international wholesale domain reseller channel. With the very recent acquisition of Enom and its expected operating synergies to come over the next 24 months, we anticipate further efficiencies in the future. Ting Mobile delivered outstanding growth, finishing the year with a run rate of over $35 million in annual gross margin. And Ting Internet took significant strides toward future contribution as we added new towns, expanded our networks, drove demand and optimized our operations and processes.”

Mr. Noss added, “We begin 2017 in a tremendous position to continue to grow our bottom line and invest in our priorities.”

Financial Results

Net revenue for the fourth quarter of 2016 increased 9% to 48.8 million from $44.7 million for the fourth quarter of 2015.

Net income for the fourth quarter of 2016 decreased to $2.8 million, or $0.27 per share, from $3.1 million, or $0.29 per share, for the fourth quarter of 2015. Net income for the fourth quarter of 2016 was negatively impacted during the quarter by one-time items totaling $1.0 million related to the eNom acquisition and the Ting Mobile business. Adjusted EBITDA¹ for the fourth quarter of 2016 increased to $7.3 million from $5.5 million for the fourth quarter of 2015.

Cash and cash equivalents at the end of the fourth quarter of 2016 were $15.1 million compared with $10.5 million at the end of the third quarter of 2016 and $7.7 million at the end of the fourth quarter of 2015. The increase relative to the third quarter of 2016 was primarily the result of cash provided by operating activities of $8.9 million, which was partially offset by a further investment of $4.0 million in property and equipment, primarily for the continued build out of the Ting Internet footprint and scheduled loan repayments of $0.3 million.

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 integration 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.

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 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 $1.3 million for the three months and year ended December 31, 2015.

Conference Call
Tucows management will host a conference call today, Tuesday, February 7, 2017 at 5:00 p.m. (ET) to discuss the Company’s fourth 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 58593654 followed by the pound key. The telephone replay will be available until Tuesday, February 14, 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)

	December 31,		December 31,
		2016		2015
	(unaudited)		(unaudited)

Assets

Current assets:
Cash and cash equivalents	$	15,105,075	$	7,723,253
Accounts receivable		10,925,622		7,171,388
Inventory		1,210,789		903,775
Prepaid expenses and deposits		6,250,555		5,067,790
Derivative instrument asset, current portion		172,888		-
Prepaid domain name registry and ancillary services fees, current portion		49,396,737		44,708,041
Income taxes recoverable		220,451		2,292,915
Total current assets		83,282,117		67,867,162

Prepaid domain name registry and ancillary services fees, long-term portion		10,993,156		11,040,929
Property and equipment		13,450,438		7,126,676
Deferred tax asset		5,708,725		7,621,092
Intangible assets		19,973,793		14,469,677
Goodwill		21,005,143		21,005,143
Total assets	$	154,413,372	$	129,130,679


Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable	$	4,786,645	$	4,166,135
Accrued liabilities		7,098,905		5,855,686
Customer deposits		5,418,622		5,136,909
Derivative instrument liability, current portion		-		2,027,086
Deferred rent, current portion		20,854		19,463
Loan payable, current portion		2,233,110		3,500,000
Deferred revenue, current portion		62,795,079		56,646,390
Accreditation fees payable, current portion		528,027		465,300
Income taxes payable		1,548,121		444,053
Total current liabilities		84,429,363		78,261,022

Deferred revenue, long-term portion		15,053,977		14,947,639
Accreditation fees payable, long-term portion		115,084		118,480
Deferred rent, long-term portion		124,202		100,864
Loan payable, long-term portion		8,015,698		-
Other liabilities		944,680		1,459,960
Deferred tax liability		4,827,192		4,876,691

Redeemable non-controlling interest		3,086,090		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;10,461,574 shares issued and outstanding as of December 31, 2016 and 10,685,599 shares issued and outstanding as of December 31, 2015		14,460,500		14,530,633
Additional paid-in capital		2,857,921		8,526,395
Retained earnings		20,399,511		4,381,849
Accumulated other comprehensive income (loss)		99,154		(1,109,452	)
Total stockholders' equity		37,817,086		26,329,425
Total liabilities and stockholders' equity	$	154,413,372	$	129,130,679

Tucows Inc.
Consolidated Statements of Operations
(Dollar amounts in U.S. dollars)

		Three months ended December 31,						Year ended December 31,
		2016			2015			2016			2015
		(unaudited)						(unaudited)

Net revenues	$	48,804,603		$	44,706,681		$	189,818,932		$	171,686,779

Cost of revenues:
Cost of revenues		30,741,469			29,213,212			120,186,962			112,980,685
Network expenses (*)		1,285,123			1,326,564			5,210,500			5,464,777
Depreciation of property and equipment		343,400			341,252			1,319,819			1,144,988
Amortization of intangible assets		11,532			11,532			48,017			38,520
Total cost of revenues		32,381,524			30,892,560			126,765,298			119,628,970

Gross profit		16,423,079			13,814,121			63,053,634			52,057,809

Expenses:
Sales and marketing (*)		5,580,133			4,850,984			20,754,752			17,394,376
Technical operations and development (*)		1,049,701			1,097,793			4,494,819			4,502,845
General and administrative (*)		3,907,041			2,835,540			11,404,793			10,661,949
Depreciation of property and equipment		174,987			74,233			503,864			259,307
Amortization of intangible assets		292,116			56,997			905,157			224,206
Impairment of indefinite life intangible assets		14,928			137,268			42,673			206,116
Loss (gain) on currency forward contracts		(1,984	)		110,912			(98,977	)		792,900
Total expenses		11,016,922			9,163,727			38,007,081			34,041,699

Income from operations		5,406,157			4,650,394			25,046,553			18,016,110

Other income (expenses):
Interest expense, net		(147,970	)		2,112			(449,838	)		(159,025	)
Other income		128,422			85,872			516,209			85,872
Total other income (expenses)		(19,548	)		87,984			66,371			(73,153	)

Income before provision for income taxes		5,386,609			4,738,378			25,112,924			17,942,957

Provision for income taxes		2,569,758			1,643,038			9,045,770			6,569,227
Net income before redeemable non-controlling interest		2,816,851			3,095,340			16,067,154			11,373,730

Redeemable non-controlling interest		(172,910	)		(121,759	)		(871,493	)		(284,509	)

Net (earnings) loss attributable to redeemable non-controlling interest		172,910			121,759			871,493			284,509

Net income for the period		2,816,851			3,095,340			16,067,154			11,373,730

Other comprehensive income (loss), net of tax
Unrealized income (loss) on hedging activities		51,410			(308,217	)		567,816			(2,031,465	)
Net amount reclassified to earnings		93,954			392,095			640,790			1,544,454
Other comprehensive income (loss) net of tax of $82,694 and $46,284 for the three months ended December 31, 2016 and December 31, 2015 and $668,637 and $287,996 for the year ended December 31, 2016 and December 31, 2015		145,364			83,878			1,208,606			(487,011	)

Comprehensive income, net of tax for the period	$	2,962,215		$	3,179,218		$	17,275,760		$	10,886,719

Basic earnings per common share	$	0.27		$	0.29		$	1.53		$	1.04

Shares used in computing basic earnings per common share		10,452,765			10,704,251			10,524,856			10,968,500

Diluted earnings per common share	$	0.26		$	0.28		$	1.50		$	1.00

Shares used in computing diluted earnings per common share		10,642,853			11,034,147			10,713,595			11,360,084


(*) Stock-based compensation has been included in expenses as follows:
Network expenses	$	4,920		$	6,651		$	21,704		$	28,915
Sales and marketing	$	59,968		$	43,627		$	236,063		$	188,035
Technical operations and development	$	23,146		$	26,593		$	98,059		$	111,239
General and administrative	$	125,546		$	70,926		$	443,608		$	197,836

Tucows Inc.
Consolidated Statements of Cash Flows
(Dollar amounts in U.S. dollars)

		Three months ended December 31,						Year ended December 31,
		2016			2015			2016			2015
Cash provided by:		(unaudited)						(unaudited)
Operating activities:
Net income for the period	$	2,816,851		$	3,095,335		$	16,067,154		$	11,373,730
Items not involving cash:
Depreciation of property and equipment		518,387			415,485			1,823,683			1,404,296
Amortization of debt discount and issuance costs		22,868			-			31,166			-
Amortization of intangible assets		303,648			68,529			953,174			262,726
Impairment of indefinite life intangible asset		14,928			137,268			42,673			206,116
Deferred income taxes		(435,844	)		1,154,115			1,194,232			134,861
Amortization of deferred rent		(5,718	)		9,532			24,729			27,449
Disposal of domain names		4,110			3,515			29,691			24,066
Other income		(128,820	)		(85,872	)		(515,280	)		(85,872	)
Loss (gain) on change in the fair value of forward contracts		(30,599	)		(24,118	)		(322,732	)		136,276
Stock-based compensation		213,580			147,797			799,434			526,025
Change in non-cash operating working capital:
Accounts receivable		681,016			774,701			(3,754,234	)		(220,188	)
Inventory		291,644			(161,315	)		(307,014	)		(442,806	)
Prepaid expenses and deposits		(242,830	)		(389,949	)		(1,182,765	)		(1,282,054	)
Prepaid domain name registry and ancillary services fees		529,988			2,699,524			(4,640,923	)		630,653
Income taxes recoverable		1,623,008			(4,256,771	)		3,176,532			(2,321,345	)
Accounts payable		392,880			47,353			390,887			249,931
Accrued liabilities		2,672,288			173,903			1,243,219			1,691,356
Customer deposits		190,743			421,959			281,713			675,182
Deferred revenue		(517,636	)		(2,819,673	)		6,255,027			366,273
Accreditation fees payable		8,116			(22,089	)		59,331			(10,664	)
Net cash provided by operating activities		8,922,608			1,389,229			21,649,697			13,346,011

Financing activities:
Proceeds received on exercise of stock options		38,718			65,767			146,390			803,136
Payment of tax obligations resulting from net exercise of stock options		(44,515	)		(1,306,981	)		(363,285	)		(1,306,981	)
Excess tax benefits from share-based compensation expense		144,347			2,030,224			859,111			3,431,017
Repurchase of common stock		-			(5,437,110	)		(7,180,257	)		(23,616,286	)
Proceeds received on loan payable		-			-			16,989,583			3,500,000
Repayment of loan payable		(258,276	)		-			(9,758,276	)		-
Payment of loan payable costs		3,298			-			(513,665	)		-
Net cash provided by (used in) financing activities		(116,428	)		(4,648,100	)		179,601			(17,189,114	)

Investing activities:
Additions to property and equipment		(3,994,717	)		(916,236	)		(7,917,822	)		(2,967,360	)
Proceeds on waiver of rights to .online registry		-			-			-			6,619,831
Remaining payment for the acquisition of Ting Virginia, LLC., net of cash of $21,423		-			-			-			(357,492	)
Acquisition of intangible assets		(204,684	)		-			(6,529,654	)		-
Net cash provided by (used in) investing activities		(4,199,401	)		(916,236	)		(14,447,476	)		3,294,979

Increase (decrease) in cash and cash equivalents		4,606,779			(4,175,107	)		7,381,822			(548,124	)

Cash and cash equivalents, beginning of period		10,498,296			11,898,360			7,723,253			8,271,377
Cash and cash equivalents, end of period	$	15,105,075		$	7,723,253		$	15,105,075		$	7,723,253

Supplemental cash flow information:
Interest paid	$	126,760		$	46,126		$	420,298		$	173,197
Income taxes paid, net	$	1,258,966		$	592,798		$	3,766,664		$	3,132,105

Supplementary disclosure of non-cash investing and financing activities:
Property and equipment acquired during the period not yet paid for	$	446,821		$	217,198		$	446,821		$	217,198

Tucows Inc.
Reconciliation of Net income to Adjusted EBITDA
(In Thousands of US Dollars)

		Three months ended December 31,						Year ended December 31,
		2016			2015			2016			2015
		(unaudited)						(unaudited)

Net income for the period	$	2,817		$	3,095		$	16,067		$	11,374
Depreciation of property and equipment		518			415			1,824			1,404
Amortization of intangible assets		304			69			953			263
Impairment of intangible assets		15			137			43			206
Interest expense, net		148			(2	)		450			159
Provision for income taxes		2,570			1,643			9,046			6,569
Stock-based compensation		214			148			799			526
Unrealized loss (gain) on change in fair value of forward contracts		(31	)		(24	)		(323	)		136
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities		336			27			829			311
Acquisition and integration costs ¹		442			-			442			-

Adjusted EBITDA	$	7,333		$	5,508		$	30,130		$	20,948

¹Acquisition and integration costs represent costs incurred in connection with the acquisition of eNom, Incorporated in January 2017. These costs are primarily comprised of professional fees for legal, accounting and other services.

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.

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

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