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Tucows Reports Financial Results for Second Quarter 2020

TORONTO, Aug. 06, 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 second quarter ended June 30, 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 June 306 Months ended June 30
2020
(Un-
audited)
2019
(Un-
audited)
% Change2020
(Un-
audited)
2019
(Un-
audited)
% Change
Net revenue82,12284,117(2.4%)166,107163,0701.9%
Gross Profit22,96624,507(6.3%)48,11647,1582.0%
Net income11572,616(94.0%)2,9915,415(44.8%)
Basic Net earnings per common share0.010.25(96.0%)0.280.51(45.1%)
Adjusted EBITDA212,17511,4866.0%24,85620,91718.8%
Net cash provided by operating activities8,9396,97928.1%23,01215,97044.1%


1.Net income for the second quarter of 2020 included two non-cash, non-recurring charges for asset impairments totalling $2.3 million, or $0.22 per share. Excluding these two items, net income would have been $2.5 million, or $0.23 per share.
  
2.This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
  

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

 RevenueGross Profit
 3 Months ended
June 30 
3 Months ended
June 30
 2020
(Unaudited)
2019
(Unaudited)
2020
(Unaudited)
2019
(Unaudited)
Network Access Services:
Mobile Services17,56720,9868,907 10,180 
Other Services4,4142,6442,749 1,688 
Total Network Access Services21,98123,63011,656 11,868 
Domain Services:
Wholesale    
Domain Services46,20646,4859,852 8,668 
Value Added Services5,0344,7754,272 4,037 
Total Wholesale51,24051,26014,124 12,705 
     
Retail8,5678,7834,348 4,374 
Portfolio3334444204 297 
Total Domain Services60,14160,48718,676 17,376 
Network Expenses:
Network, other costs--(2,485)(2,385)
Network, depreciation and amortization costs--(3,356)(2,352)
Network, impairment  (1,525)- 
Total Network expenses--(7,366)(4,737)
     
Total82,12284,11722,966 24,507 


3.Beginning in the first quarter of 2020, portfolio revenue consisted of individual sales from Tucows’ surname portfolio following the sale of the Company’s remaining domain name portfolio in the fourth quarter of 2019.
  

“The second quarter was once again demonstrative of the consistency and cash generating ability of the Tucows business,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Our Domains business had another solid quarter, as we benefited from significantly higher transaction activity as micro- and small-sized businesses and start-ups acted quickly to establish a web presence for the first time amid the pandemic, in addition to our continued success focusing on the quality of our customer base for gross margin contribution.  Although a somewhat challenging quarter for our Ting Mobile business, our recently announced transition to our new Mobile Services Enabler model, with DISH as our first customer, provides a much-improved near- and long-term outlook for this business, and strong visibility around cash flows, particularly amidst a rapidly changing industry dynamic.  Finally, Ting Internet saw another quarter of steady progress across all facets of that business, meaningfully adding passed addresses, serviceable addresses and new customers, as we achieved a record quarter for capital expenditure on our network.”

Financial Results

Net revenue for the second quarter of 2020 was $82.1 million, a decrease of 2.4% from $84.1 million for the second quarter of 2019.  Gross profit for the second quarter of 2020 was $23.0 million, a decrease of 6.3% from $24.5 million for the second quarter of 2019.  The decreases in net revenue and gross margin were the result of decreases for each in the Ting Mobile business, with gross margin additionally impacted by a non-recurring asset impairment charge related to a change in strategy for the Ting Internet TV product.  Excluding the impact of the asset impairment, gross margin for the second quarter of 2020 would have increased 4.0% compared to the second quarter of 2019.

Net income for the second quarter of 2020 was $0.2 million, or $0.01 per share, compared with $2.6 million, or $0.25 per share, and included two non-cash, non-recurring charges for asset impairments totalling on an after-tax basis $2.3 million ($1.3 million related to the wind up of the Ting Mobile ROAM Mobility business and $1.0 million related to the aforementioned change in strategy for the Ting Internet TV product), or $0.22 per share. Excluding these two items, net income would have been $2.5 million, or $0.23 per share.  This compares with net income for the second quarter of 2019 of $2.6 million, or $0.25 per share.

Adjusted EBITDA1 for the second quarter of 2020 increased 6% to $12.2 million from $11.5 million for the second quarter of 2019. 

Cash and cash equivalents at the end of the second quarter of 2020 was $8.9 million compared with $12.4 million at the end of the first quarter of 2020 and $12.0 million at the end of the second 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
June 30
6 months ended
June 30
 2020 (unaudited)2019 (unaudited)2020 (unaudited)2019 (unaudited)
Net income for the period 157 2,616 2,991 5,415 
Depreciation of property and equipment3,155 2,172 6,145 4,097 
Impairment of property and equipment1,525 - 1,525 - 
Amortization of intangible assets2,830 2,565 6,131 4,605 
Impairment of definite life intangible assets1,431 - 1,431 - 
Interest expense, net846 1,314 1,996 2,286 
Accretion of contingent consideration85 - 172 - 
Provision for income taxes449 1,819 1,550 3,076 
Stock-based compensation847 685 1,648 1,210 
Unrealized loss (gain) on change in fair value of forward contracts(436)(70)(88)(188)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities441 (162)399 (490)
Acquisition and transition costs*845 547 956 906 
     
Adjusted EBITDA12,175 11,486 24,856 20,917 
*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, Cedar in January 2020, the shut-down of Roam Mobility in June of 2020 and the costs associated with various DISH agreements executed in August of 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, August 12), 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 Monday, August 17 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, mobile technology services, domain names and other Internet services. Ting Internet (https://ting.com/internet) delivers fixed fiber Internet access with outstanding customer support. Tucows’ mobile services enabler (MSE) platform provides network access, provisioning and billing services for mobile virtual network operators (MVNOs). OpenSRS (https://opensrs.com), Enom (https://www.enom.com) and Ascio (https://ascio.com) combined manage approximately 25 million domain names and millions of value-added services through a global reseller network of over 36,000 web hosts and ISPs. Hover (https://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 (https://tucows.com).

  
Tucows Inc. June 30, December 31, 
Consolidated Balance Sheets  2020  2019 
(Dollar amounts in thousands of U.S. dollars) (unaudited) (unaudited) 
      
Assets     
      
Current assets:     
Cash and cash equivalents $8,859 $20,393 
Accounts receivable  7,506  14,564 
Inventory  965  3,457 
Prepaid expenses and deposits  16,549  13,478 
Derivative instrument asset, current portion  1,080  731 
Prepaid domain name registry and ancillary services fees, current portion  96,322  91,252 
Assets held-for-sale  9,027  - 
Income taxes recoverable  1,326  1,800 
Total current assets  141,634  145,675 
      
Derivative instrument asset, long-term portion  611  - 
Prepaid domain name registry and ancillary services fees, long-term portion  17,902  17,915 
Property and equipment  101,292  82,121 
Right of use operating lease asset  11,066  11,335 
Contract costs  344  1,400 
Deferred tax asset  340  - 
Intangible assets  52,732  57,654 
Goodwill  116,270  109,818 
Total assets $442,191 $425,918 
      
      
Liabilities and Stockholders' Equity     
      
Current liabilities:     
Accounts payable $6,511 $6,671 
Accrued liabilities  9,915  9,373 
Customer deposits  14,468  14,074 
Derivative instrument liability  561  - 
Liabilities held-for-sale  751  - 
Operating lease liability, current portion  1,506  1,413 
Deferred revenue, current portion  129,072  123,101 
Accreditation fees payable, current portion  1,018  952 
Income taxes payable  1,291  1,324 
Total current liabilities  165,093  156,908 
      
Derivative instrument liability  158  - 
Deferred revenue, long-term portion  26,228  26,202 
Accreditation fees payable, long-term portion  204  216 
Operating lease liability, long-term portion  9,169  9,424 
Loan payable, long-term portion  113,608  113,503 
Other long-term liability  3,244  - 
Deferred tax liability  27,113  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; 10,570,360 shares issued and outstanding as of June 30, 2020 and 10,585,159 shares issued and outstanding as of December 31, 2019  18,865  16,633 
Additional paid-in capital  591  880 
Retained earnings  77,322  76,208 
Accumulated other comprehensive income (loss)  596  473 
Total stockholders' equity  97,374  94,194 
Total liabilities and stockholders' equity $442,191 $425,918 
      



         
Tucows Inc. Three months ended June 30,
  Six months ended June 30,
 
Consolidated Statements of Operations and Comprehensive Income 2020  2019  2020  2019 
(Dollar amounts in thousands of U.S. dollares) (unaudited) (unaudited) (unaudited) (unaudited)
         
Net revenues$82,122 $84,117 $166,107 $163,070 
         
Cost of revenues:        
Cost of revenues 51,790  54,873  104,978  106,805 
Network expenses (*) 2,485  2,385  4,901  4,780 
Depreciation of property and equipment 3,030  2,038  5,907  3,839 
Amortization of intangible assets 326  314  680  488 
Impairment of property and equipment 1,525  -  1,525  - 
Total cost of revenues 59,156  59,610  117,991  115,912 
         
Gross profit 22,966  24,507  48,116  47,158 
         
Expenses:        
Sales and marketing (*) 9,218  8,856  18,203  17,597 
Technical operations and development (*) 3,067  2,752  5,818  5,275 
General and administrative (*) 5,465  4,796  10,206  9,244 
Depreciation of property and equipment 125  134  238  258 
Amortization of intangible assets 2,504  2,251  5,451  4,117 
Impairment of definite life intangible assets 1,431  -  1,431  - 
Loss (gain) on currency forward contracts (381) (31) 60  (110)
Total expenses 21,429  18,758  41,407  36,381 
         
Income from operations 1,537  5,749  6,709  10,777 
         
Other income (expenses):        
Interest expense, net (846) (1,314) (1,996) (2,286)
Other expense, net (85) -  (172) - 
Total other income (expenses) (931) (1,314) (2,168) (2,286)
         
Income before provision for income taxes 606  4,435  4,541  8,491 
         
Provision for income taxes 449  1,819  1,550  3,076 
Net income for the period 157  2,616  2,991  5,415 
         
Other comprehensive income, net of tax        
Unrealized income (loss) on hedging activities 1,114  240  (120) 789 
Net amount reclassified to earnings 200  80  243  141 
Other comprehensive income (loss) net of tax (expense) recovery of $398 and $103 for the three months ended June 30, 2020 and June 30, 2019 and $32 and $298 for the six months ended June 30, 2020 and June 30, 2019 1,314  320  123  930 
         
Comprehensive income, net of tax for the period$1,471 $2,936 $3,114 $6,345 
         
Basic earnings per common share$0.01 $0.25 $0.28 $0.51 
         
Shares used in computing basic earnings per common share 10,567,382  10,657,124  10,589,806  10,646,045 
         
Diluted earnings per common share$0.01 $0.24 $0.28 $0.50 
         
Shares used in computing diluted earnings per common share 10,653,527  10,840,005  10,684,304  10,837,456 
         
         
         
(*) Stock-based compensation has been included in expenses as follows:        
Network expenses$109 $72 $196 $129 
Sales and marketing$375 $297 $745 $494 
Technical operations and development$184 $132 $351 $249 
General and administrative$179 $183 $356 $338 
         



         
Tucows Inc.  Three months ended June 30,   Six months ended June 30, 
Consolidated Statements of Cash Flows 2020  2019  2020  2019 
(Dollar amounts in thousands of U.S. dollars) (unaudited) (unaudited) (unaudited) (unaudited)
         
Cash provided by:        
Operating activities:        
Net income for the period$157 $2,616 $2,991 $5,415 
Items not involving cash:        
Depreciation of property and equipment 3,155  2,172  6,145  4,097 
Loss on write off/impairment of property and equipment 1,525  -  1,525  22 
Amortization of debt discount and issuance costs 67  90  134  168 
Amortization of intangible assets 2,830  2,565  6,131  4,605 
Net amortization contract costs 95  34  124  53 
Accretion of contingent consideration 85  -  172  - 
Impairment of definite life intangible asset 1,431  -  1,431  - 
Other 223  -  223  - 
Deferred income taxes (recovery) (917) 1,449  (1,107) 1,911 
Excess tax benefits on share-based compensation expense (164) (381) (344) (737)
Net Right of use operating assets/Operating lease liability 291  79  112  49 
Loss on disposal of domain names 2  2  15  6 
Loss (gain) on change in the fair value of forward contracts (436) (70) (88) (188)
Stock-based compensation 847  685  1,648  1,210 
Change in non-cash operating working capital:        
Accounts receivable 401  1,031  2,552  (157)
Inventory 900  108  1,804  516 
Prepaid expenses and deposits (3,247) (2,524) (3,222) (2,914)
Prepaid domain name registry and ancillary services fees (2,204) 1,651  (5,057) (65)
Income taxes recoverable 294  (1,639) 794  (2,875)
Accounts payable (1,521) (1,170) 250  (384)
Accrued liabilities 2,165  2,266  334  3,587 
Customer deposits 336  (808) 394  (521)
Deferred revenue 2,655  (1,131) 5,997  2,138 
Accreditation fees payable (31) (46) 54  34 
Net cash provided by operating activities 8,939  6,979  23,012  15,970 
         
Financing activities:        
Proceeds received on exercise of stock options 29  122  46  194 
Payment of tax obligations resulting from net exercise of stock options (165) (185) (347) (524)
Repurchase of common stock (164) -  (3,281) - 
Proceeds received on loan payable -  7,431  -  40,371 
Repayment of loan payable -  (3) -  (4,603)
Payment of loan payable costs (7) (434) (32) (641)
Net cash (used in) provided by financing activities (307) 6,931  (3,614) 34,797 
         
Investing activities:        
Additions to property and equipment (12,150) (10,414) (22,093) (20,849)
Acquisition of other assets -  (2,501) -  (2,501)
Acquisition of Cedar Holdings Group (net of cash of $66) -  -  (8,770) - 
Acquisition of Ascio Technologies (net of cash of $1) -  -  -  (28,024)
Acquisition of intangible assets (69) (27) (69) (27)
Net cash used in investing activities (12,219) (12,942) (30,932) (51,401)
         
(Decrease) increase in cash and cash equivalents (3,587) 968  (11,534) (634)
         
Cash and cash equivalents, beginning of period 12,446  11,035  20,393  12,637 
Cash and cash equivalents, end of period$8,859 $12,003 $8,859 $12,003 
         
Supplemental cash flow information:        
Interest paid$686 $1,318 $1,840 $2,294 
Income taxes paid, net$1,243 $2,046 $2,200 $4,164 
         
Supplementary disclosure of non-cash investing and financing activities:        
Property and equipment acquired during the period not yet paid for$635 $674 $635 $674 
Fair value of shares issued for acquisition of Cedar Holdings Group$- $- $2,000 $- 
Fair value of contingent consideration for acquisition of Cedar Holdings Group$7 $- $3,072 $- 
         



          
Tucows Inc. Three months ended June 30, Six months ended June 30, 
Reconciliation of Net income to Adjusted EBITDA 2020  2019  2020  2019  
(Dollar amounts in thousands of U.S. dollars) (unaudited) (unaudited) (unaudited) (unaudited) 
          
Net income for the period$157 $2,616 $2,991 $5,415  
Depreciation of property and equipment 3,155  2,172  6,145  4,097  
Loss on write off/impairment of property and equipment 1,525  -  1,525  -  
Amortization of intangible assets 2,830  2,565  6,131  4,605  
Impairment of definite life intangible asset 1,431  -  1,431  -  
Interest expense, net 846  1,314  1,996  2,286  
Accretion of contingent consideration 85  -  172  -  
Provision for income taxes 449  1,819  1,550  3,076  
Stock-based compensation 847  685  1,648  1,210  
Unrealized loss (gain) on change in fair value of forward contracts (436) (70) (88) (188) 
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities 441  (162) 399  (490) 
Acquisition and other costs1 845  547  956  906  
          
Adjusted EBITDA$12,175 $11,486 $24,856 $20,917  
          
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, Cedar in January 2020 and the costs associated with various DISH agreements executed in August of 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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