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 EBITDA^1,2	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	%

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.
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

“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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Tucows Reports Continuing Strong Financial Results for Second Quarter of 2017

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