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 30 9 Months Ended September 30
2016(Unaudited) 2015(Unaudited) % Change 2016(Unaudited) 2015(Unaudited) % Change
Net revenue 49,064 44,268   11 % 141,014 126,985   11 %
Net income 4,741 3,159   50 % 13,250 8,278   60 %
Net earnings per common share 0.45 0.29   55 % 1.26 0.75   68 %
Adjusted EBITDA 1 8,575 5,800   48 % 22,798 15,439   48 %
Net cash provided by operating activities 5,001 6,783   -26 % 12,727 11,957   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)
  Revenue Gross Margin
  3 Months ended September 30 3 Months ended September 30
  2016(Unaudited) 2015(Unaudited) 2016(Unaudited) 2015(Unaudited)
Network Access Services:
Mobile Services 18,375 15,359   9,288     6,583  
Other Services 878 916   376     542  
    Total Network Access Services 19,253 16,275   9,664     7,125  
         
Domain Services:
Wholesale        
  Domain Services 22,956 21,124   4,021     3,642  
  Value Added Services 2,227 2,400   1,764     1,913  
    Total Wholesale 25,183 23,524   5,785     5,555  
         
Retail 3,721 3,220   1,993     1,790  
Portfolio 907 1,248   776     1,079  
    Total Domain Services 29,811 27,992   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 margin 49,064 44,268   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 EBITDA 1 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 EBITDA 1 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 CallTucows 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 TucowsTucows is a provider of network access, domain names and other Internet services. Ting (https://ting.com) delivers mobile phone service and fixed Internet access with outstanding customer support. OpenSRS (http://opensrs.com) 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 ChamberlainNATIONAL Equicom(416) 848-1457lchamberlain@national.ca

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