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Tucows Reports Continuing Strong Financial Results for First Quarter 2018

Quarter Highlighted by Strong Year-Over-Year Growth Across Key Financial Metrics

TORONTO, May 09, 2018 (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 first quarter ended March 31, 2018. All figures are in U.S. dollars.

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

 3 Months Ended March 31
2018
(Unaudited)
2017
(Unaudited)
% Change
Net revenue95,79669,56838%
Net income3,7442,44653%
Basic Net earnings per common share0.350.2352%
Adjusted EBITDA110,3786,33964%
Net cash provided by operating activities9,5732,402299%
    
  1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.

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

 RevenueGross Margin
 3 Months ended March 313 Months ended March 31
 2018
(Unaudited)
2017
(Unaudited)
2018
(Unaudited)
2017
(Unaudited)
Network Access Services:
Mobile Services21,87217,96310,6068,396
Other Services1,7361,287795462
Total Network Access Services23,60819,25011,4018,857
     
Domain Services:
Wholesale    
Domain Services58,42839,0927,1144,629
Value Added Services4,4353,9083,5773,332
Total Wholesale62,86243,00010,6917,961
     
Retail8,4376,4024,0272,784
Portfolio889917704655
Total Domain Services72,18750,31815,42211,400
     
Network Expenses:
Network, other costs--(2,574)(2,343)
Network, depreciation and amortization costs--(1,630)(971)
Total Network expenses--(4,204)(3,314)
     
Total revenue/gross margin95,79669,56822,61916,944
     

“The first quarter was a solid start to 2018, with strong year-over-year growth in revenue, net income, adjusted EBITDA and cash flow from operations,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Our domains business continued its consistent performance as the Enom integration continues to progress on plan. Ting Mobile posted another quarter of solid year-over-year revenue and margin growth.  On Ting Internet, we continued to see strong adoption in our three active towns and we prepared to start lighting up customers in our next two. Meanwhile, we announced our next Ting town, Fuquay-Varina, North Carolina.”

Financial Results

Net revenue for the first quarter of 2018 increased 38% to $95.8 million from $69.6 million for the first quarter of 2017 and benefited from the accelerated revenue recognition of $14.6 million related to a bulk transfer of 2.65 million domain names during the first quarter of 2018.

Net income for the first quarter of 2018 increased to $3.7 million, or $0.35 per share, from $2.4 million, or $0.23 per share, for the first quarter of 2017 driven by the growth in Adjusted EBITDA and lower statutory tax rates as a result of the Tax Cuts and Jobs Act of 2017.

Adjusted EBITDA1 for the first quarter of 2018 increased 64% to $10.4 million from $6.3 million for the first quarter of 2017 driven by Enom and Ting Mobile. 

Cash and cash equivalents at the end of the first quarter of 2018 was $16.6 million compared with $18.0 million at the end of the fourth quarter of 2017 and $15.0 million at the end of the first 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 March 31
 2018 (unaudited)2017 (unaudited)
Net income for the period 3,7442,446
Depreciation of property and equipment1,232757
Amortization of intangible assets2,3311,761
Interest expense, net896868
Provision for income taxes1,183(125)
Stock-based compensation578318
Unrealized loss (gain) on change in fair value of forward contracts(3)(18)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities176(50)
Acquisition and transition costs*241382
   
Adjusted EBITDA10,3786,339
*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.

Conference Call
Tucows management will host a conference call today, Wednesday, May 9, 2018 at 5:00 p.m. ET to discuss the Company’s first quarter 2018 results and outlook for the Company. 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 5873817 followed by the pound key. The telephone replay will be available until Wednesday, May 16, 2018 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 24 million domain names and millions of value-added services through a global reseller network of over 39,000 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)    
      
  March 31, December 31, 
  2018 2017 
  (unaudited) (unaudited) 
      
Assets     
      
Current assets:     
Cash and cash equivalents $16,587,886 $18,049,164 
Accounts receivable  12,685,140  12,376,104 
Inventory  2,898,383  2,944,246 
Prepaid expenses and deposits  14,710,902  14,185,586 
Derivative instrument asset, current portion  21,515  - 
Prepaid domain name registry and ancillary services fees, current portion  95,019,044  103,302,472 
Income taxes recoverable  2,625,063  3,003,873 
Total current assets  144,547,933  153,861,445 
      
Derivative instrument asset, long-term portion  4,588  - 
        
Prepaid domain name registry and ancillary services fees, long-term portion  20,640,539  23,700,931 
Property and equipment  28,688,762  24,620,298 
Contract costs  1,378,336  - 
Intangible assets  56,047,310  58,414,178 
Goodwill  90,053,483  90,053,483 
Total assets $341,360,951 $350,650,335 
      
      
Liabilities and Stockholders' Equity     
      
Current liabilities:     
Accounts payable $9,343,179 $7,026,282 
Accrued liabilities  7,171,475  6,412,578 
Customer deposits  12,980,327  15,255,305 
Deferred rent, current portion  21,048  20,991 
Loan payable, current portion  18,289,853  18,289,853 
Deferred revenue, current portion  122,203,880  129,154,622 
Accreditation fees payable, current portion  1,226,544  1,174,733 
Income taxes payable  984,707  1,226,157 
Total current liabilities  172,221,013  178,560,521 
      
Deferred revenue, long-term portion  28,779,438  31,426,906 
Accreditation fees payable, long-term portion  277,022  288,755 
Deferred rent, long-term portion  129,885  129,777 
Loan payable, long-term portion  54,127,120  58,634,174 
Deferred Gain  300,580  429,400 
Deferred tax liability  20,116,385  19,833,678 
      
Redeemable non-controlling interest  -  1,136,390 
      
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; 10,592,115 shares issued and outstanding as of March 31, 2018 and 10,583,879 shares issued and outstanding as of December 31, 2017  15,426,104  15,368,161 
Additional paid-in capital  2,547,140  2,166,768 
Retained earnings  47,418,839  42,675,805 
Accumulated other comprehensive income  17,425  - 
Total stockholders' equity  65,409,508  60,210,734 
Total liabilities and stockholders' equity $341,360,951 $350,650,335 
      


  Tucows  Inc. 
  Consolidated Statements of Operations 
  (Dollar amounts in U.S. dollars) 
     
   
Three months ended March 31, 
  2018  2017 
   (unaudited) 
     
Net revenues$95,795,691 $69,568,062 
     
Cost of revenues:    
Cost of revenues 68,972,220  49,310,712 
Network expenses (*) 2,574,087  2,343,196 
Depreciation of property and equipment 1,131,143  590,347 
Amortization of intangible assets 499,032  380,162 
Total cost of revenues 73,176,482  52,624,417 
     
Gross profit 22,619,209  16,943,645 
     
Expenses:    
Sales and marketing (*) 8,364,787  7,219,322 
Technical operations and development (*) 2,094,689  1,694,141 
General and administrative (*) 4,531,412  3,457,343 
Depreciation of property and equipment 101,072  166,317 
Amortization of intangible assets 1,831,730  1,380,809 
Loss (gain) on currency forward contracts (3,093) (34,425)
Total expenses 16,920,597  13,883,507 
     
Income from operations 5,698,612  3,060,138 
     
Other income (expenses):    
Interest expense, net (895,962) (867,993)
Other income 123,960  128,897 
Total other income (expenses) (772,002) (739,096)
     
Income before provision for income taxes 4,926,610  2,321,042 
     
Provision for income taxes 1,182,918  (125,449)
Net income before redeemable non-controlling interest 3,743,692  2,446,491 
     
Redeemable non-controlling interest (26,336) (125,764)
     
Net income attributable to redeemable non-controlling interest 26,336  125,764 
Net income for the period 3,743,692  2,446,491 
     
Other comprehensive income (loss), net of tax    
Unrealized income (loss) on hedging activities 17,425  186,229 
Net amount reclassified to earnings -  (80,620)
Other comprehensive income (loss) net of tax of $5,585 and $60,079 for the three months ended March 31, 2018 and March 31, 2017 17,425  105,609 
     
Comprehensive income, net of tax for the period$3,761,117 $2,552,100 
     
Basic earnings per common share$0.35 $0.23 
     
Shares used in computing basic earnings per common share 10,588,718  10,474,647 
     
Diluted earnings per common share$0.35 $0.23 
     
Shares used in computing diluted earnings per common share 10,792,613  10,776,515 
     
     
     
(*) Stock-based compensation has been included in expenses as follows:    
Network expenses$55,838 $4,383 
Sales and marketing$186,940 $59,001 
Technical operations and development$176,511 $61,410 
General and administrative$158,893 $193,026 
     


   Tucows  Inc.  
   Consolidated Statements of Cash Flows  
   (Dollar amounts in U.S. dollars)  
    
 
   Three months ended March 31, 
 
  2018  2017  
Cash provided by:  (unaudited)  
Operating activities:     
Net income for the period$3,743,692 $2,446,491  
Items not involving cash:     
Depreciation of property and equipment 1,232,215  756,664  
Amortization of debt discount and issuance costs 69,533  67,105  
Amortization of intangible assets 2,330,762  1,760,971  
Net amortization of capitalized contract costs 25,272  -  
Deferred income taxes (recovery) (47,034) 1,199,661  
Excess tax benefits on share-based compensation expense (143,969) (989,332) 
Amortization of deferred rent 165  4,032  
Loss on disposal of domain names 37,478  9,789  
Other income (128,820) (128,820) 
Loss (gain) on change in the fair value of forward contracts (3,093) (17,949) 
Stock-based compensation 578,182  317,820  
Change in non-cash operating working capital:     
Accounts receivable (309,036) 41,721  
Inventory 45,863  170,996  
Prepaid expenses and deposits (525,316) (3,557,508) 
Prepaid domain name registry and ancillary services fees 11,343,820  (5,489,422) 
Income taxes recoverable 264,829  (2,660,528) 
Accounts payable 2,132,453  (3,446,427) 
Accrued liabilities 758,897  1,830,922  
Customer deposits (2,274,978) (83,591) 
Deferred revenue (9,598,210) 10,240,649  
Accreditation fees payable 40,078  (71,327) 
Net cash provided by operating activities 9,572,783  2,401,917  
      
Financing activities:     
Proceeds received on exercise of stock options 7,201  19,869  
Payment of tax obligations resulting from net exercise of stock options (147,068) (712,234) 
Proceeds received on loan payable -  86,998,000  
Repayment of loan payable (4,571,843) (6,258,278) 
Payment of loan payable costs (4,125) (591,175) 
Net cash (used in) provided by financing activities (4,715,835) 79,456,182  
      
Investing activities:     
Additions to property and equipment (5,116,854) (3,692,893) 
Acquisition of a portion of the minority interest in Ting Virginia, LLC. (1,200,000) (2,000,000) 
Acquisition of Enom Incorporated, net of cash -  (76,237,460) 
Acquisition of intangible assets (1,372) -  
Net cash used in investing activities (6,318,226) (81,930,353) 
      
Decrease in cash and cash equivalents (1,461,278) (72,254) 
      
Cash and cash equivalents, beginning of period 18,049,164  15,105,075  
Cash and cash equivalents, end of period$16,587,886 $15,032,821  
      
Supplemental cash flow information:     
Interest paid$901,344 $872,645  
Income taxes paid, net$1,337,123 $2,342,916  
      
Supplementary disclosure of non-cash investing and financing activities:     
Property and equipment acquired during the period not yet paid for$397,661 $250,847  
      


Reconciliation of Net income to Adjusted EBITDA     
(In Thousands of US Dollars)      
(unaudited)      
      
   Three months ended March 31,  
   2018
(unaudited)
 2017
(unaudited)
 
       
Net income for the period $3,744 $2,446  
Depreciation of property and equipment 1,232  757  
Amortization of intangible assets 2,331  1,761  
Interest expense, net 896  868  
Provision for income taxes 1,183  (125) 
Stock-based compensation 578  318  
Unrealized loss (gain) on change in fair value of forward contracts (3) (18) 
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities 176  (50) 
Acquisition and other costs1 241  382  
      
Adjusted EBITDA$10,378 $6,339  
      
      
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 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
lawrence.chamberlain@loderockadvisors.com

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