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Tucows Reports Financial Results for First Quarter 2020

TORONTO, May 07, 2020 (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, 2020. All figures are in U.S. dollars.

COVID-19:  Tucows shareholders and prospective investors are encouraged to read Tucows’ public statement regarding COVID-19, which is available here: https://bit.ly/2LavpOc.

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

 3 Months Ended March 31
2020
(Unaudited)
2019
(Unaudited)
% Change
Net revenue83,98578,9536%
Gross Profit25,15022,65111%
Net income2,8342,7991%
Basic Net earnings per common share0.270.264%
Adjusted EBITDA1,212,6819,43134%
Net cash provided by operating activities14,0738,99157%


1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
2. Adjusted EBITDA for the three-month period ended March 31, 2020 reflects the impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Ascio acquisition on March 18, 2019, which lowered Adjusted EBITDA by $0.1 million, compared to $0.2 million for the three-month period ended March 31, 2019.
  

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

 RevenueGross Profit
 3 Months ended
March 31 
3 Months ended
March 31
 2020
(Unaudited)
2019
(Unaudited)
2020
(Unaudited)
2019
(Unaudited)
Network Access Services:
Mobile Services20,14820,80910,291 10,066 
Other Services4,3082,4432,592 1,374 
Total Network Access Services24,45623,25212,883 11,440 
Domain Services:
Wholesale    
Domain Services45,96442,5919,495 7,752 
Value Added Services4,7074,1843,922 3,390 
Total Wholesale50,67146,77513,417 11,142 
     
Retail8,4498,6424,215 4,283 
Portfolio3409284282 156 
Total Domain Services59,52955,70117,914 15,581 
Network Expenses:
Network, other costs--(2,416)(2,395)
Network, depreciation and amortization costs--(3,231)(1,975)
Total Network expenses--(5,647)(4,370)
     
Total83,98578,95325,150 22,651 


3. During the first quarter of 2020, portfolio revenue consisted of individual sales from its surname portfolio following the sale of the Company’s remaining domain name portfolio in the fourth quarter of 2019. Going forward, portfolio revenue will only consist of surname portfolio sales.
  

“The first quarter was a very solid start to 2020, highlighted by year-over-year growth in revenue and gross profit of 6% and 11%, respectively, and cash flow from operations of more than $14 million,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Our Domains business continued to benefit from our focus on high-quality reseller customers, which contributed to more than a 20% year-over-year increase in gross margin in the Wholesale channel. In our Ting Mobile business, as expected we benefited from the improved economics of our carrier relationships.  And at Ting Internet, we continued to steadily expand the network, adding another new town, further expanding potential serviceable addresses, increasing the number of homes passed, adding new customers, and nearly doubling gross profit year-over-year with the contribution of the acquisition of Cedar Holdings, which we closed on January 1.”

Financial Results

Net revenue for the first quarter of 2020 increased 6% to $84.0 million from $79.0 million for the first quarter of 2019.

Net income for the first quarter of 2020 increased 1.3% to just over $2.8 million, or $0.27 per share, from just under $2.8 million, or $0.26 per share, for the first quarter of 2019. 

Adjusted EBITDA1 for the first quarter of 2020 increased 34% to $12.7 million from $9.4 million for the first quarter of 2019. Adjusted EBITDA for the first quarter of 2020 reflects a full quarter of contribution from the Ascio and Cedar Holdings acquisitions in March 2019 and January 2020, respectively.  

Cash and cash equivalents at the end of the first quarter of 2020 was $12.4 million compared with $20.4 million at the end of the fourth quarter of 2019 and $11.0 million at the end of the first quarter of 2019.

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 (net), accretion of contingent consideration, stock-based compensation, asset impairment, gains and losses from unrealized foreign currency transactions and infrequently occurring items, including acquisition and transition 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
 2020 (unaudited)2019 (unaudited)
Net income for the period 2,834 2,799 
Depreciation of property and equipment2,990 1,925 
Amortization of intangible assets3,301 2,040 
Interest expense, net1,150 972 
Accretion of contingent consideration87 - 
Provision for income taxes1,101 1,257 
Stock-based compensation801 525 
Unrealized loss (gain) on change in fair value of forward contracts348 (118)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities(42)(328)
Acquisition and transition costs*111 359 
   
Adjusted EBITDA12,681 9,431 
*Acquisition and other costs represent transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to the Company’s acquisition of Ascio in March 2019 and Cedar in January 2020.  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 commentary 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 six days (until Wednesday, May 13), shareholders, analysts and prospective investors can submit questions to Tucows’ management at ir@tucows.com. Management will post responses to questions of general interest to the Company’s web site at http://www.tucows.com/investors/financials/ on Wednesday, May 20 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), Enom (http://www.enom.com) and Ascio (http://ascio.com) combined manage approximately 24 million domain names and millions of value-added services through a global reseller network of over 36,000 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. March 31, December 31, 
Consolidated Balance Sheets  2020   2019 
(Dollar amounts in thousands of U.S. dollars) (unaudited) (unaudited) 
      
Assets     
      
Current assets:     
Cash and cash equivalents $12,446  $20,393 
Accounts receivable  12,480   14,564 
Inventory  2,553   3,457 
Prepaid expenses and deposits  13,464   13,478 
Derivative instrument asset, current portion  172   731 
Prepaid domain name registry and ancillary services fees, current portion  93,893   91,252 
Income taxes recoverable  1,460   1,800 
Total current assets  136,468   145,675 
      
Derivative instrument asset, long-term portion  370   - 
Prepaid domain name registry and ancillary services fees, long-term portion  18,127   17,915 
Property and equipment  94,289   82,121 
Right of use operating lease asset  11,463   11,335 
Contract costs  1,371   1,400 
Intangible assets  59,915   57,654 
Goodwill  115,837   109,818 
Total assets $437,840  $425,918 
      
      
Liabilities and Stockholders' Equity     
      
Current liabilities:     
Accounts payable $8,996  $6,671 
Accrued liabilities  7,838   9,373 
Customer deposits  14,132   14,074 
Derivative instrument liability  1,718   - 
Operating lease liability, current portion  1,488   1,413 
Deferred revenue, current portion  126,152   123,101 
Accreditation fees payable, current portion  1,045   952 
Income taxes payable  1,302   1,324 
Total current liabilities  162,671   156,908 
      
Deferred revenue, long-term portion  26,493   26,202 
Accreditation fees payable, long-term portion  208   216 
Operating lease liability, long-term portion  9,293   9,424 
Loan payable, long-term portion  113,545   113,503 
Other long-term liability  3,152   - 
Deferred tax liability  27,122   25,471 
      
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; 10,562,774 shares issued and outstanding as of March 31, 2020 and 10,585,159 shares issued and outstanding as of December 31, 2019  18,751   16,633 
Additional paid-in capital  -   880 
Retained earnings  77,323   76,208 
Accumulated other comprehensive income (loss)  (718)  473 
Total stockholders' equity  95,356   94,194 
Total liabilities and stockholders' equity $437,840  $425,918 
      

 



Tucows Inc. Three months ended March 31,
Consolidated Statements of Operations and Comprehensive Income 2020   2019 
(Dollar amounts in thousands of U.S. dollars) (unaudited)  (unaudited)
      
Net revenues$83,985  $78,953 
      
Cost of revenues:     
Cost of revenues 53,188   51,932 
Network expenses (*) 2,416   2,395 
Depreciation of property and equipment 2,877   1,801 
Amortization of intangible assets 354   174 
Total cost of revenues 58,835   56,302 
      
Gross profit 25,150   22,651 
      
Expenses:     
Sales and marketing (*) 8,985   8,741 
Technical operations and development (*) 2,751   2,523 
General and administrative (*) 4,741   4,448 
Depreciation of property and equipment 113   124 
Amortization of intangible assets 2,947   1,866 
Loss (gain) on currency forward contracts 441   (79)
Total expenses 19,978   17,623 
      
Income from operations 5,172   5,028 
      
Other income (expenses):     
Interest expense, net (1,150)  (972)
Other income, net (87)  - 
Total other income (expenses) (1,237)  (972)
      
Income before provision for income taxes 3,935   4,056 
      
Provision for income taxes 1,101   1,257 
Net income for the period 2,834   2,799 
      
Other comprehensive income, net of tax     
Unrealized income (loss) on hedging activities (1,234)  549 
Net amount reclassified to earnings 43   61 
Other comprehensive income (loss) net of tax (expense) recovery of $366 and ($194) for the three months ended March 31, 2020 and March 31, 2019 (1,191)  610 
      
Comprehensive income, net of tax for the period$1,643  $3,409 
      
Basic earnings per common share$0.27  $0.26 
      
Shares used in computing basic earnings per common share 10,612,230   10,634,842 
      
Diluted earnings per common share$0.26  $0.26 
      
Shares used in computing diluted earnings per common share 10,713,678   10,835,897 
      
      
      
(*) Stock-based compensation has been included in expenses as follows:     
Network expenses$87  $57 
Sales and marketing$370  $196 
Technical operations and development$167  $117 
General and administrative$177  $155 
      

 



Tucows Inc. Three months ended March 31, 
Consolidated Statements of Cash Flows 2020  2019 
(Dollar amounts in thousands of U.S. dollars) (unaudited) (unaudited)
     
Cash provided by:    
Operating activities:    
Net income for the period$2,834 $2,799 
Items not involving cash:    
Depreciation of property and equipment 2,990  1,925 
Loss on write off of property and equipment -  22 
Amortization of debt discount and issuance costs 67  78 
Amortization of intangible assets 3,301  2,040 
Net amortization contract costs 29  19 
Accretion of contingent consideration 87  - 
Deferred income taxes (recovery) (190) 462 
Excess tax benefits on share-based compensation expense (180) (356)
Net Right of use operating assets/Operating lease liability (179) (30)
Loss on disposal of domain names 13  4 
Loss (gain) on change in the fair value of forward contracts 348  (118)
Stock-based compensation 801  525 
Change in non-cash operating working capital:    
Accounts receivable 2,151  (1,188)
Inventory 904  408 
Prepaid expenses and deposits 25  (390)
Prepaid domain name registry and ancillary services fees (2,853) (1,716)
Income taxes recoverable 500  (1,236)
Accounts payable 1,771  786 
Accrued liabilities (1,831) 1,321 
Customer deposits 58  287 
Deferred revenue 3,342  3,269 
Accreditation fees payable 85  80 
Net cash provided by operating activities 14,073  8,991 
     
Financing activities:    
Proceeds received on exercise of stock options 17  72 
Payment of tax obligations resulting from net exercise of stock options (182) (339)
Repurchase of common stock (3,117) - 
Proceeds received on loan payable -  32,940 
Repayment of loan payable -  (4,600)
Payment of loan payable costs (25) (207)
Net cash (used in) provided by financing activities (3,307) 27,866 
     
Investing activities:    
Additions to property and equipment (9,943) (10,435)
Acquisition of Cedar Holdings Group (net of cash of $66) (8,770) - 
Acquisition of Ascio Technologies (net of cash of $1) -  (28,024)
Net cash used in investing activities (18,713) (38,459)
     
(Decrease) increase in cash and cash equivalents (7,947) (1,602)
     
Cash and cash equivalents, beginning of period 20,393  12,637 
Cash and cash equivalents, end of period$12,446 $11,035 
     
Supplemental cash flow information:    
Interest paid$1,154 $976 
Income taxes paid, net$956 $2,118 
     
Supplementary disclosure of non-cash investing and financing activities:    
Property and equipment acquired during the period not yet paid for$1,102 $392 
Fair value of shares issued for acquisition of Cedar Holdings Group$2,000 $- 
Fair value of contingent consideration for acquisition of Cedar Holdings Group$3,065 $- 
     

 



      
Tucows Inc. Three months ended March 31,
Reconciliation of Net income to Adjusted EBITDA 2020   2019 
(Dollar amounts in thousands of U.S. dollars) (unaudited)  (unaudited)
      
Net income for the period$2,834  $2,799 
Depreciation of property and equipment 2,990   1,925 
Amortization of intangible assets 3,301   2,040 
Interest expense, net 1,150   972 
Accretion of contingent consideration 87   - 
Provision for income taxes 1,101   1,257 
Stock-based compensation 801   525 
Unrealized loss (gain) on change in fair value of forward contracts 348   (118)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities (42)  (328)
Acquisition and other costs1 111   359 
      
Adjusted EBITDA$12,681  $9,431 
      
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, Ascio in March 2019 and Cedar in January 2020. 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 expectations 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, Ascio 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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