2018 Highlighted by Record Revenue, Adjusted EBITDA² and Cash Flow from Operations

TORONTO, Feb. 13, 2019 (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, 2018. 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
	2018 (Unaudited)	2017 (Unaudited)	% Change		2018 (Unaudited)	2017 (Unaudited)	% Change
Net revenue	85,612	90,621	-6%		346,013	329,421	5%
Net income1	4,436	11,199	-60%		17,135	22,327	-23%
Basic Net earnings per common share1	0.42	1.06	-60%		1.62	2.12	-24%
Adjusted EBITDA2,3	16,633	15,276	9%		50,057	41,357	21%
Net cash provided by operating activities	10,668	14,081	-24%		37,209	31,896	17%

1. Net Income and Earnings Per Share for the fourth quarter and Fiscal 2017 reflected a net positive implementation impact from the Tax Cuts and Jobs Act of 2017 of $5.8 million and $0.55 per share, respectively.
2. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
3. Adjusted EBITDA for the fourth quarter and twelve month period of 2017 reflect the impact 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 $0.8 million and $7.8 million for the fourth quarter and twelve months of 2017, respectively.

Summary of Revenues and Gross profit
(In Thousands of US Dollars)

	Revenue		Gross profit
	3 Months ended  December 31		3 Months ended December 31
	2018 (Unaudited)	2017 (Unaudited)	2018 (Unaudited)		2017 (Unaudited)
Network Access Services:
Mobile Services	22,511	23,795	11,093		11,094
Other Services	2,320	1,590	1,429		651
Total Network Access Services	24,831	25,385	12,522		11,745
Domain Services:
Wholesale
Domain Services	43,396	48,320	7,752		6,514
Value Added Services	4,180	4,305	3,438		3,733
Total Wholesale	47,576	52,625	11,190		10,247
Retail	8,880	8,711	4,475		4,141
Portfolio	4,325	3,900	3,900		3,376
Total Domain Services	60,781	65,236	19,565		17,764
Network Expenses:
Network, other costs	–	–	(2,256	)	(2,260	)
Network, depreciation and amortization costs	–	–	(2,100	)	(1,513	)
Total Network expenses	–	–	(4,356	)	(3,773	)
Total	85,612	90,621	27,731		25,736

“The fourth quarter once again saw solid, consistent performance across the business, highlighted by year-over-year gross profit expansion in both Domains and Network Access and 9% growth in adjusted EBITDA,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc.  “The quarter capped off another record year in terms of revenue, gross profit, adjusted EBITDA and cash flow from operations. As importantly, the cash generation of the Domains and Ting Mobile businesses fueled our build-out of the Ting Internet footprint that will drive our next phase of outsized growth.”

“Ting Internet made strong, steady progress throughout the year, growing our serviceable addresses, customers and recurring monthly revenue, adding a sixth town early in the year and readying for the seventh announced just last week. At Ting Mobile, we again delivered strong year-over-year growth in revenue, margin and gross profit. In our Domains business, we made significant progress in the integration of Enom, with more than half of the $5 million in expected EBITDA synergies now realized, as well as the development of the new platform, positioning this business for potential new growth opportunities.”

“All of these achievements position Tucows for an exciting 2019 in each of our businesses and improving growth that will drive long-term value for our shareholders.”

Financial Results

Net revenue for the fourth quarter of 2018 was $85.6 million compared with $90.6 million for the fourth quarter of 2017, with the decrease due primarily to acceleration of revenue related to the bulk transfer of 2.8 million very low margin domain names in the first and third quarters of 2018.  Excluding the impact of these of bulk transfers, net revenue for the fourth quarter of 2018 increased 2% compared to the fourth quarter of 2017.

Net income for the fourth quarter of 2018 was $4.4 million, or $0.42 per share compared with $11.2 million, or $1.06 per share, for the fourth quarter of 2017.  Net income for the fourth quarter of 2017 was positively impacted by the tax related implementation impacts from the Tax Cuts and Jobs Act of 2017 for $5.8 million or $0.55 per share.

Adjusted EBITDA¹ for the fourth quarter of 2018 increased 9% to $16.6 million from $15.3 million for the fourth quarter of 2017. 

Cash and cash equivalents at the end of the fourth quarter of 2018 were $12.6 million compared with $10.8 million at the end of the third quarter of 2018 and $18.0 million at the end of the fourth quarter of 2017.

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 discloses and discusses a non-GAAP financial measure, adjusted EBITDA, in press releases and 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 December 31			12 months ended December 31
	2018 (unaudited)	2017 (unaudited)		2018 (unaudited)	2017 (unaudited)
Net income for the period	4,436	11,199		17,135	22,327
Depreciation of property and equipment	1,716	1,114		5,722	3,727
Amortization of intangible assets	2,290	2,330		9,243	8,400
Impairment of intangible assets	–	110		–	111
Interest expense, net	926	865		3,687	3,567
Provision for income taxes	5,239	(1,032	)	9,020	1,748
Stock-based compensation	670	623		2,574	1,457
Unrealized loss (gain) on change in fair value of forward contracts	201	54		207	18
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities	752	(45	)	943	(804	)
Acquisition and transition costs*	403	58		1,526	806
Adjusted EBITDA	16,633	15,276		50,057	41,357
*Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily 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.

Conference Call
Concurrent with the dissemination of this news release, management’s pre-recorded remarks discussing the quarter and outlook for the Company have been posted to the Tucows web site at http://www.tucows.com/investors/financials.  In lieu of a live question and answer period, for the next five days (until Monday, February 18), shareholders, analysts and prospective investors can submit questions to Tucows’ management at [email protected]. Management will post responses to questions of general interest to the Company’s web site at http://www.tucows.com/investors/financials/ on Tuesday, February 26 at approximately 4:00 p.m. ET.  All questions will receive a response, however, questions of a more specific nature may be responded to directly.

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 23 million domain names and millions of value-added services through a global reseller network of over 37,000 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 thousands of U.S. dollars)
		December 31,				December 31,
			2018			2017*
		(unaudited)				(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	12,637			$	18,049
Accounts receivable			10,837				12,376
Inventory			3,775				2,944
Prepaid expenses and deposits			15,472				14,186
Prepaid domain name registry and ancillary services fees, current portion			87,782				103,302
Income taxes recoverable			1,423				3,004
Total current assets			131,926				153,861
Prepaid domain name registry and ancillary services fees, long-term portion			18,745				23,701
Property and equipment			48,065				24,620
Contract costs			1,390				–
Intangible assets			49,395				58,414
Goodwill			90,054				90,054
Total assets		$	339,575			$	350,650
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	8,445			$	7,026
Accrued liabilities			5,899				6,412
Customer deposits			11,919				15,255
Derivative instrument liability			1,276				–
Deferred rent, current portion			21				21
Loan payable, current portion			18,400				18,290
Deferred revenue, current portion			116,734				129,155
Accreditation fees payable, current portion			985				1,175
Income taxes payable			1,668				1,226
Total current liabilities			165,347				178,560
Deferred revenue, long-term portion			26,960				31,427
Accreditation fees payable, long-term portion			250				289
Deferred rent, long-term portion			116				130
Loan payable, long-term portion			46,201				58,634
Deferred Gain			–				429
Deferred tax liability			20,925				19,834
Redeemable non-controlling interest			–				1,136
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; 10,627,988 shares issued and outstanding as of December 31, 2018 and 10,583,879 shares issued and outstanding as of December 31, 2017			15,823				15,368
Additional paid-in capital			3,953				2,167
Retained earnings			60,810				42,676
Accumulated other comprehensive income			(810	)			–
Total stockholders’ equity			79,776				60,211
Total liabilities and stockholders’ equity		$	339,575			$	350,650
*The Company has initially applied ASC 2014-09 (Topic 606) using the modified retrospective method. Under this method, the comparative information is not restated.

 

	Tucows  Inc.
	Consolidated Statements of Operations
	(Dollar amounts in thousands of U.S. dollars)
		Three months ended December 31,						Year ended December 31,
		2018			20171			2018			20171
		(unaudited)						(unaudited)
Net revenues	$	85,612		$	90,621		$	346,013		$	329,421
Cost of revenues:
Cost of revenues		53,525			61,112			232,103			230,600
Network expenses (*)		2,256			2,260			9,846			9,324
Depreciation of property and equipment		1,601			1,014			5,298			3,142
Amortization of intangible assets		499			499			1,996			1,834
Total cost of revenues		57,881			64,885			249,243			244,900
Gross profit		27,731			25,736			96,770			84,521
Expenses:
Sales and marketing (*)		8,434			7,372			33,063			29,423
Technical operations and development (*)		2,091			1,855			8,748			7,258
General and administrative (*)		4,804			3,468			17,710			13,594
Depreciation of property and equipment		115			100			424			585
Amortization of intangible assets		1,791			1,831			7,247			6,566
Impairment of indefinite life intangible assets		–			110			–			111
Loss (gain) on currency forward contracts		232			17			254			(98	)
Total expenses		17,467			14,753			67,446			57,439
Income from operations		10,264			10,983			29,324			27,082
Other income (expenses):
Interest expense, net		(926	)		(865	)		(3,687	)		(3,567	)
Other income, net		337			49			518			560
Total other income (expenses)		(589	)		(816	)		(3,169	)		(3,007	)
Income before provision for income taxes		9,675			10,167			26,155			24,075
Provision for income taxes		5,239			(1,032	)		9,020			1,748
Net income before redeemable non-controlling interest		4,436			11,199			17,135			22,327
Redeemable non-controlling interest		–			(75	)		(26	)		(387	)
Net income attributable to redeemable non-controlling interest		–			75			26			387
Net income for the period		4,436			11,199			17,135			22,327
Other comprehensive income, net of tax
Unrealized income (loss) on hedging activities		(910	)		(88	)		(1,022	)		550
Net amount reclassified to earnings		136			(234	)		212			(650	)
Other comprehensive income (loss) net of tax of $ 241 and $ 183 for the three months ended December 31, 2018 and  December 31, 2017, $ 259 and $ – for the year ended December 31, 2018 and  December 31, 2017		(774	)		(322	)		(810	)		(100	)
Comprehensive income, net of tax for the period	$	3,662		$	10,877		$	16,325		$	22,227
Basic earnings per common share	$	0.42		$	1.06		$	1.62		$	2.12
Shares used in computing basic earnings per common share		10,621,181			10,580,429			10,604,722			10,537,356
Diluted earnings per common share	$	0.41		$	1.04		$	1.59		$	2.07
Shares used in computing diluted earnings per common share		10,791,940			10,802,817			10,794,170			10,793,622
(*) Stock-based compensation has been included in expenses as follows:
Network expenses	$	70		$	50		$	223		$	110
Sales and marketing	$	286		$	255		$	1,025		$	573
Technical operations and development	$	135		$	145		$	636		$	360
General and administrative	$	179		$	173		$	690		$	414
1The Company has initially applied ASC 2014-09 (Topic 606) using the modified retrospective method. Under this method, the comparative information is not restated.

 

	Tucows  Inc.
	Consolidated Statements of Cash Flows
	(Dollar amounts in thousands of U.S. dollars)
	Three months ended December 31,							Year ended December 31,
		2018			2017*			2018			2017*
Cash provided by:	(unaudited)							(unaudited)
Operating activities:
Net income for the period	$	4,436		$	11,199		$	17,135		$	22,327
Items not involving cash:
Depreciation of property and equipment		1,716			1,114			5,722			3,727
Loss on write off of property and equipment		–			–			–			17
Amortization of debt discount and issuance costs		70			69			281			273
Amortization of intangible assets		2,290			2,330			9,243			8,400
Net amortization contract costs		(7	)		–			14			–
Impairment of indefinite life intangible asset		–			110			–			111
Deferred income taxes (recovery)		1,899			(326	)		1,038			(3,337	)
Excess tax benefits on share-based compensation expense		(165	)		(181	)		(697	)		(2,796	)
Amortization of deferred rent		(5	)		–			(14	)		6
Loss on disposal of domain names		271			266			341			291
Other income		(258	)		(129	)		(429	)		(515	)
Loss (gain) on change in the fair value of forward contracts		194			54			207			17
Stock-based compensation		670			623			2,574			1,457
Change in non-cash operating working capital:
Accounts receivable		692			1,340			1,539			1,010
Inventory		(635	)		5			(831	)		(1,733	)
Prepaid expenses and deposits		(918	)		527			(1,286	)		(1,642	)
Prepaid domain name registry and ancillary services fees		4,699			3,460			20,476			4,030
Income taxes recoverable		2,398			(2,241	)		2,691			(426	)
Accounts payable		(877	)		856			171			(3,826	)
Accrued liabilities		(978	)		(2,269	)		(513	)		(1,275	)
Customer deposits		34			(78	)		(3,336	)		1,085
Deferred revenue		(4,798	)		(2,610	)		(16,888	)		4,933
Accreditation fees payable		(60	)		(38	)		(229	)		(238	)
Net cash provided by operating activities		10,668			14,081			37,209			31,896
Financing activities:
Proceeds received on exercise of stock options		50			48			112			222
Payment of tax obligations resulting from net exercise of stock options		(41	)		(23	)		(445	)		(1,462	)
Proceeds received on loan payable		4,500			–			7,000			86,998
Repayment of loan payable		(4,384	)		(4,572	)		(19,596	)		(19,976	)
Payment of loan payable costs		–			–			(8	)		(620	)
Net cash (used in) provided by financing activities		125			(4,547	)		(12,937	)		65,162
Investing activities:
Additions to property and equipment		(8,480	)		(3,474	)		(27,919	)		(12,935	)
Acquisition of a portion of the minority interest in Ting Virginia, LLC		–			–			(1,200	)		(2,000	)
Acquisition of Enom Incorporated, net of cash		–			–			–			(76,237	)
Acquisition of intangible assets		(451	)		(558	)		(565	)		(2,942	)
Net cash used in investing activities		(8,931	)		(4,032	)		(29,684	)		(94,114	)
(Decrease) increase in cash and cash equivalents		1,862			5,502			(5,412	)		2,944
Cash and cash equivalents, beginning of period		10,775			12,547			18,049			15,105
Cash and cash equivalents, end of period	$	12,637		$	18,049		$	12,637		$	18,049
Supplemental cash flow information:
Interest paid	$	931		$	871		$	3,712		$	3,587
Income taxes paid, net	$	1,742		$	1,502		$	7,112		$	7,815
Supplementary disclosure of non-cash investing and financing activities:
Property and equipment acquired during the period not yet paid for	$	1,462		$	214		$	1,462		$	214
*The Company has initially applied ASC 2014-09 (Topic 606) using the modified retrospective method. Under this method, the comparative information is not restated.

 

Reconciliation of Net income to Adjusted EBITDA
(In Thousands of US Dollars)
(unaudited)
		Three months ended December 31,					Year ended December 31,
		2018 (unaudited)		2017 (unaudited)			2018 (unaudited)		2017 (unaudited)
Net income for the period	$	4,436	$	11,199		$	17,135	$	22,327
Depreciation of property and equipment		1,716		1,114			5,722		3,727
Amortization of intangible assets		2,290		2,330			9,243		8,400
Impairment of intangible assets		–		110			–		111
Interest expense, net		926		865			3,687		3,567
Provision for income taxes		5,239		(1,032	)		9,020		1,748
Stock-based compensation		670		623			2,574		1,457
Unrealized loss (gain) on change in fair value of forward contracts		201		54			207		18
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities		752		(45	)		943		(804	)
Acquisition and other costs1		403		58			1,526		806
Adjusted EBITDA	$	16,633	$	15,276		$	50,057	$	41,357
1Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily 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 realize synergies from the Enom acquisition and our expectation for growth of Ting Internet. 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
Loderock Advisors
(416) 519-4196
[email protected]