Tucows Reports Financial Results for First Quarter 2019
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."
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.
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.
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 firstname.lastname@example.org. 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.
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.