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Tucows Reports Financial Results for First Quarter 2019

GlobeNewswire - Wed May 8, 4:06PM CDT

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, 2019. All figures are in U.S. dollars.

Summary Financial Results

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

3 Months Ended March 31
                                          2019        2018        % Change
                                          (Unaudited) (Unaudited)
Net revenue                               78,953      95,795      -18%
Net income                                2,799       3,744       -25%
Basic Net earnings per common share       0.26        0.35        -26%
Adjusted EBITDA                           9,431       10,378      -9%
Net cash provided by operating activities 8,991       9,573       -6%

-- Tucows first quarter 2019 results include 13 days of contribution of Ascio Technologies ("Ascio"), which the Company acquired on March 18, 2019.

-- Net revenue for the first quarter of 2018 included the recognition of $14.6 million in accelerated revenue related to the bulk transfer of nearly 2.65 million very low-margin domain names during that period.

-- This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.

-- Adjusted EBITDA for the first quarter of 2019 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 $0.2 million.

Summary of Revenues and Gross profit

(In Thousands of US Dollars)

Revenue                 Gross profit
                                             3 Months ended          3 Months ended
                                             March 31                March 31
                                             2019        2018        2019        2018
                                             (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Network Access Services:
Mobile Services                              20,809      21,872      10,066      10,606
Other Services                               2,443       1,736       1,374       795
Total Network Access Services                23,252      23,608      11,440      11,401
Domain Services:
Wholesale
Domain Services                              42,591      58,428      7,752       7,114
Value Added Services                         4,184       4,434       3,390       3,577
Total Wholesale                              46,775      62,862      11,142      10,691
Retail                                       8,642       8,436       4,283       4,027
Portfolio                                    284         889         156         704
Total Domain Services                        55,701      72,187      15,581      15,422
Network Expenses:
Network, other costs                         -           -           (2,395)     (2,574)
Network, depreciation and amortization costs -           -           (1,975)     (1,630)
Total Network expenses                       -           -           (4,370)     (4,204)
Total                                        78,953      95,795      22,651      22,619

"Our Domain Services and Ting Mobile businesses continue to generate strong cash flows to support our investment in our outsized Ting Internet opportunity," said Elliot Noss, President and Chief Executive Officer, Tucows Inc. "During the first quarter, we saw continuing steady progress on Ting Internet, as we further expanded our networks, increased the number of serviceable addresses, and grew our subscriber base. We also added our seventh town, Wake Forest, North Carolina, followed shortly thereafter by our eighth, Fullerton, California, just after quarter end. Our solid start to the year positions Tucows for improved growth in 2019 and beyond."

Financial Results

Net revenue for the first quarter of 2019 was $79.0 million compared with $95.8 million for the first quarter of 2018, with the first quarter of 2018 benefitting from accelerated revenue recognition of $14.6 million related to a bulk transfer of 2.65 million domain names during that period. Excluding the impact of the accelerated revenue, net revenue for the first quarter of 2019 decreased 3% compared to the first quarter of 2018.

Net income for the first quarter of 2019 was $2.8 million, or $0.26 per share, compared with $3.7 million, or $0.35 per share, for the first quarter of 2018.

Adjusted EBITDA for the first quarter of 2019 was $9.4 million compared with $10.4 million for the first quarter of 2018. Adjusted EBITDA for the first quarter 2019 reflects the impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Ascio acquisition, which lowered Adjusted EBITDA by $0.2 million. The estimated impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue on Adjusted EBITDA is approximately $3.0 million, the majority of which will be reflected in our 2019 financial results.

Cash and cash equivalents at the end of the first quarter of 2019 were $11.0 million compared with $12.6 million at the end of the fourth quarter of 2018 and $16.6 million at the end of the first quarter of 2018.

Notes:

5. 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 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
                                                                                                                                      2019 (unaudited)        2018 (unaudited)
Net income for the period                                                                                                             2,799                   3,744
Depreciation of property and equipment                                                                                                1,925                   1,232
Amortization of intangible assets                                                                                                     2,040                   2,331
Interest expense, net                                                                                                                 972                     896
Provision for income taxes                                                                                                            1,257                   1,183
Stock-based compensation                                                                                                              525                     578
Unrealized loss (gain) on change in fair value of forward contracts                                                                   (118)                   (3)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities                         (328)                   176
Acquisition and transition costs*                                                                                                     359                     241
Adjusted EBITDA                                                                                                                       9,431                   10,378
*Acquisition and other costs represent transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to the Company's acquisition of Enom in January 2017 and Ascio in March 2019.  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 six days (until Tuesday, May 14), 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 Tuesday, May 21 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) manage a combined 25 million domain names and millions of value-added services through a global reseller network of over 38,000 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)
                                                                                                                                                                                                March 31,                                December 31,
                                                                                                                                                                                                                   2019                  2018*
                                                                                                                                                                                                (unaudited)                              (unaudited)
Assets
Current assets:
Cash and cash equivalents                                                                                                                                                                       $                  11,035                $                  12,637
Accounts receivable                                                                                                                                                                                                13,120                                   10,837
Inventory                                                                                                                                                                                                          3,367                                    3,775
Prepaid expenses and deposits                                                                                                                                                                                      16,498                                   15,472
Prepaid domain name registry and ancillary services fees, current portion                                                                                                                                          99,962                                   87,782
Income taxes recoverable                                                                                                                                                                                           2,048                                    1,423
Total current assets                                                                                                                                                                                               146,030                                  131,926
Prepaid domain name registry and ancillary services fees, long-term portion                                                                                                                                        18,599                                   18,745
Property and equipment                                                                                                                                                                                             55,486                                   48,065
Right of use operating lease                                                                                                                                                                                       12,206                                   -
Contract costs                                                                                                                                                                                                     1,371                                    1,390
Intangible assets                                                                                                                                                                                                  61,991                                   49,395
Goodwill                                                                                                                                                                                                           109,777                                  90,054
Total assets                                                                                                                                                                                    $                  405,460               $                  339,575
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable                                                                                                                                                                                $                  8,459                 $                  8,445
Accrued liabilities                                                                                                                                                                                                8,055                                    5,899
Customer deposits                                                                                                                                                                                                  14,571                                   11,919
Derivative instrument liability                                                                                                                                                                                    353                                      1,276
Deferred rent, current portion                                                                                                                                                                                     -                                        21
Operating lease liability, current portion                                                                                                                                                                         1,917                                    -
Loan payable, current portion                                                                                                                                                                                      24,788                                   18,400
Deferred revenue, current portion                                                                                                                                                                                  131,801                                  116,734
Accreditation fees payable, current portion                                                                                                                                                                        1,076                                    985
Income taxes payable                                                                                                                                                                                               702                                      1,668
Total current liabilities                                                                                                                                                                                          191,722                                  165,347
Deferred revenue, long-term portion                                                                                                                                                                                27,618                                   26,960
Accreditation fees payable, long-term portion                                                                                                                                                                      239                                      250
Deferred rent, long-term portion                                                                                                                                                                                   -                                        116
Operating lease liability, long-term portion                                                                                                                                                                       9,793                                    -
Loan payable, long-term portion                                                                                                                                                                                    68,026                                   46,201
Deferred Gain                                                                                                                                                                                                      -                                        -
Deferred tax liability                                                                                                                                                                                             24,621                                   20,925
Redeemable non-controlling interest                                                                                                                                                                                -                                        -
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; 10,643,750 shares issued and outstanding as of March 31, 2019 and 10,627,988 shares issued and outstanding as of December 31, 2018                     16,188                                   15,823
Additional paid-in capital                                                                                                                                                                                         3,844                                    3,953
Retained earnings                                                                                                                                                                                                  63,609                                   60,810
Accumulated other comprehensive income                                                                                                                                                                             (200               )                     (810               )
Total stockholders' equity                                                                                                                                                                                         83,441                                   79,776
Total liabilities and stockholders' equity                                                                                                                                                      $                  405,460               $                  339,575
*The Company has initially applied ASC 2016-02 (Topic 842) using the modified retrospective method. Under this method, the comparative information is not restated.
Tucows  Inc.
Consolidated Statements of Operations and Comprehensive Income
(Dollar amounts in thousands of U.S. dollars)
                                                                                                                                  Three months ended March 31,
                                                                                                                                  2019                        2018
                                                                                                                                  (unaudited)
Net revenues                                                                                                                    $ 78,953                    $ 95,795
Cost of revenues:
Cost of revenues                                                                                                                  51,932                      68,972
Network expenses (*)                                                                                                              2,395                       2,574
Depreciation of property and equipment                                                                                            1,801                       1,131
Amortization of intangible assets                                                                                                 174                         499
Total cost of revenues                                                                                                            56,302                      73,176
Gross profit                                                                                                                      22,651                      22,619
Expenses:
Sales and marketing (*)                                                                                                           8,741                       8,365
Technical operations and development (*)                                                                                          2,523                       2,095
General and administrative (*)                                                                                                    4,448                       4,530
Depreciation of property and equipment                                                                                            124                         101
Amortization of intangible assets                                                                                                 1,866                       1,832
Loss (gain) on currency forward contracts                                                                                         (79                     )   (3                      )
Total expenses                                                                                                                    17,623                      16,920
Income from operations                                                                                                            5,028                       5,699
Other income (expenses):
Interest expense, net                                                                                                             (972                    )   (896                    )
Other income, net                                                                                                                 -                           124
Total other income (expenses)                                                                                                     (972                    )   (772                    )
Income before provision for income taxes                                                                                          4,056                       4,927
Provision for income taxes                                                                                                        1,257                       1,183
Net income before redeemable non-controlling interest                                                                             2,799                       3,744
Redeemable non-controlling interest                                                                                               -                           (26                     )
Net income attributable to redeemable non-controlling interest                                                                    -                           26
Net income for the period                                                                                                         2,799                       3,744
Other comprehensive income, net of tax
Unrealized income (loss) on hedging activities                                                                                    549                         17
Net amount reclassified to earnings                                                                                               61                          -
Other comprehensive income (loss) net of tax of $ (194) and $ (6) for the three months ended March 31, 2019 and  March 31, 2018   610                         17
Comprehensive income, net of tax for the period                                                                                 $ 3,409                     $ 3,761
Basic earnings per common share                                                                                                 $ 0.26                      $ 0.35
Shares used in computing basic earnings per common share                                                                          10,634,842                  10,588,718
Diluted earnings per common share                                                                                               $ 0.26                      $ 0.35
Shares used in computing diluted earnings per common share                                                                        10,835,897                  10,792,613
(*) Stock-based compensation has been included in expenses as follows:
Network expenses                                                                                                                $ 57                        $ 56
Sales and marketing                                                                                                             $ 196                       $ 188
Technical operations and development                                                                                            $ 117                       $ 177
General and administrative                                                                                                      $ 155                       $ 159
The Company has initially applied ASC 2016-02 (Topic 842) 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 March 31,
                                                                           2019                        2018*
Cash provided by:                                                          (unaudited)
Operating activities:
Net income for the period                                                $ 2,799                     $ 3,744
Items not involving cash:
Depreciation of property and equipment                                     1,925                       1,232
Loss on write off of property and equipment                                22                          -
Amortization of debt discount and issuance costs                           78                          70
Amortization of intangible assets                                          2,040                       2,331
Net amortization contract costs                                            19                          25
Deferred income taxes (recovery)                                           462                         (47                     )
Excess tax benefits on share-based compensation expense                    (356                    )   (144                    )
Net Right of use operating assets/Operating lease liability                (30                     )   -
Loss on disposal of domain names                                           4                           37
Other income                                                               -                           (129                    )
Loss (gain) on change in the fair value of forward contracts               (118                    )   (3                      )
Stock-based compensation                                                   525                         578
Change in non-cash operating working capital:
Accounts receivable                                                        (1,188                  )   (309                    )
Inventory                                                                  408                         46
Prepaid expenses and deposits                                              (390                    )   (525                    )
Prepaid domain name registry and ancillary services fees                   (1,716                  )   11,344
Income taxes recoverable                                                   (1,236                  )   265
Accounts payable                                                           786                         2,132
Accrued liabilities                                                        1,321                       759
Customer deposits                                                          287                         (2,275                  )
Deferred revenue                                                           3,269                       (9,598                  )
Accreditation fees payable                                                 80                          40
Net cash provided by operating activities                                  8,991                       9,573
Financing activities:
Proceeds received on exercise of stock options                             72                          7
Payment of tax obligations resulting from net exercise of stock options    (339                    )   (147                    )
Proceeds received on loan payable                                          32,940                      -
Repayment of loan payable                                                  (4,600                  )   (4,572                  )
Payment of loan payable costs                                              (207                    )   (4                      )
Net cash (used in) provided by financing activities                        27,866                      (4,716                  )
Investing activities:
Additions to property and equipment                                        (10,435                 )   (5,117                  )
Acquisition of a portion of the minority interest in Ting Virginia, LLC    -                           (1,200                  )
Acquisition of Ascio Technologies Inc. (net of cash of $1,437)             (28,024                 )   -
Acquisition of intangible assets                                           -                           (1                      )
Net cash used in investing activities                                      (38,459                 )   (6,318                  )
(Decrease) increase in cash and cash equivalents                           (1,602                  )   (1,461                  )
Cash and cash equivalents, beginning of period                             12,637                      18,049
Cash and cash equivalents, end of period                                 $ 11,035                    $ 16,588
Supplemental cash flow information:
Interest paid                                                            $ 976                       $ 901
Income taxes paid, net                                                   $ 2,118                     $ 1,337
Supplementary disclosure of non-cash investing and financing activities:
Property and equipment acquired during the period not yet paid for       $ 392                       $ 398
*The Company has initially applied ASC 2016-02 (Topic 842) 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 March 31,
                                                                                                                2019 (unaudited)                                            2018 (unaudited)
Net income for the period                                                                                     $ 2,799                                                     $ 3,744
Depreciation of property and equipment                                                                          1,925                                                       1,232
Amortization of intangible assets                                                                               2,040                                                       2,331
Interest expense, net                                                                                           972                                                         896
Provision for income taxes                                                                                      1,257                                                       1,183
Stock-based compensation                                                                                        525                                                         578
Unrealized loss (gain) on change in fair value of forward contracts                                             (118                                                    )   (3                                                      )
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities   (328                                                    )   176
Acquisition and other costs                                                                                     359                                                         241
Adjusted EBITDA                                                                                               $ 9,431                                                     $ 10,378
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 and Ascio in March 2019. 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

Loderock Advisors

(416) 519-4196

lawrence.chamberlain@loderockadvisors.com

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