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Tucows Reports Continuing Strong Financial Results for Fourth Quarter and Full Year 2018

GlobeNewswire - Wed Feb 13, 4:04PM CST

2018 Highlighted by Record Revenue, Adjusted EBITDA and Cash Flow from Operations

Tucows Inc. (NASDAQ:TCX, TSX:TC), a provider of network access, domain names and other Internet services, today reported its financial results for the fourth quarter ended December 31, 2018. All figures are in U.S. dollars.

Summary Financial Results

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

3 Months Ended December 31      12 Months Ended December 31
                                          2018        2017        % Change2018        2017        % Change
                                          (Unaudited) (Unaudited)         (Unaudited) (Unaudited)
Net revenue                               85,612      90,621      -6%     346,013     329,421     5%
Net income                                4,436       11,199      -60%    17,135      22,327      -23%
Basic Net earnings per common share       0.42        1.06        -60%    1.62        2.12        -24%
Adjusted EBITDA                           16,633      15,276      9%      50,057      41,357      21%
Net cash provided by operating activities 10,668      14,081      -24%    37,209      31,896      17%

-- Net Income and Earnings Per Share for the fourth quarter and Fiscal 2017 reflected a net positive implementation impact from the Tax Cuts and Jobs Act of 2017 of $5.8 million and $0.55 per share, respectively.

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

-- Adjusted EBITDA for the fourth quarter and twelve month period of 2017 reflect the impact of the purchase price accounting adjustment related to the fair value write down of deferred revenue from the Enom acquisition which lowered Adjusted EBITDA by $0.8 million and $7.8 million for the fourth quarter and twelve months of 2017, respectively.

Summary of Revenues and Gross profit

(In Thousands of US Dollars)

Revenue                 Gross profit
                                             3 Months ended          3 Months ended
                                             December 31             December 31
                                             2018        2017        2018        2017
                                             (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Network Access Services:
Mobile Services                              22,511      23,795      11,093      11,094
Other Services                               2,320       1,590       1,429       651
Total Network Access Services                24,831      25,385      12,522      11,745
Domain Services:
Wholesale
Domain Services                              43,396      48,320      7,752       6,514
Value Added Services                         4,180       4,305       3,438       3,733
Total Wholesale                              47,576      52,625      11,190      10,247
Retail                                       8,880       8,711       4,475       4,141
Portfolio                                    4,325       3,900       3,900       3,376
Total Domain Services                        60,781      65,236      19,565      17,764
Network Expenses:
Network, other costs                         -           -           (2,256 )    (2,260 )
Network, depreciation and amortization costs -           -           (2,100 )    (1,513 )
Total Network expenses                       -           -           (4,356 )    (3,773 )
Total                                        85,612      90,621      27,731      25,736

"The fourth quarter once again saw solid, consistent performance across the business, highlighted by year-over-year gross profit expansion in both Domains and Network Access and 9% growth in adjusted EBITDA," said Elliot Noss, President and Chief Executive Officer, Tucows Inc. "The quarter capped off another record year in terms of revenue, gross profit, adjusted EBITDA and cash flow from operations. As importantly, the cash generation of the Domains and Ting Mobile businesses fueled our build-out of the Ting Internet footprint that will drive our next phase of outsized growth."

"Ting Internet made strong, steady progress throughout the year, growing our serviceable addresses, customers and recurring monthly revenue, adding a sixth town early in the year and readying for the seventh announced just last week. At Ting Mobile, we again delivered strong year-over-year growth in revenue, margin and gross profit. In our Domains business, we made significant progress in the integration of Enom, with more than half of the $5 million in expected EBITDA synergies now realized, as well as the development of the new platform, positioning this business for potential new growth opportunities."

"All of these achievements position Tucows for an exciting 2019 in each of our businesses and improving growth that will drive long-term value for our shareholders."

Financial Results

Net revenue for the fourth quarter of 2018 was $85.6 million compared with $90.6 million for the fourth quarter of 2017, with the decrease due primarily to acceleration of revenue related to the bulk transfer of 2.8 million very low margin domain names in the first and third quarters of 2018. Excluding the impact of these of bulk transfers, net revenue for the fourth quarter of 2018 increased 2% compared to the fourth quarter of 2017.

Net income for the fourth quarter of 2018 was $4.4 million, or $0.42 per share compared with $11.2 million, or $1.06 per share, for the fourth quarter of 2017. Net income for the fourth quarter of 2017 was positively impacted by the tax related implementation impacts from the Tax Cuts and Jobs Act of 2017 for $5.8 million or $0.55 per share.

Adjusted EBITDA for the fourth quarter of 2018 increased 9% to $16.6 million from $15.3 million for the fourth quarter of 2017.

Cash and cash equivalents at the end of the fourth quarter of 2018 were $12.6 million compared with $10.8 million at the end of the third quarter of 2018 and $18.0 million at the end of the fourth quarter of 2017.

Notes:

1. Adjusted EBITDA

Tucows reports all financial information required in accordance with United States generally accepted accounting principles (GAAP). Along with this information, to assist financial statement users in an assessment of our historical performance, the Company typically discloses and discusses a non-GAAP financial measure, adjusted EBITDA, in press releases and on investor conference calls and related events that exclude certain non-cash and other charges as the Company believes that the non-GAAP information enhances investors' overall understanding of our financial performance.

The Company believes that the provision of this supplemental non-GAAP measure allows investors to evaluate the operational and financial performance of the Company's core business using similar evaluation measures to those used by management. The Company uses adjusted EBITDA to measure its performance and prepare its budgets. Since adjusted EBITDA is a non-GAAP financial performance measure, the Company's calculation of adjusted EBITDA may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. Because adjusted EBITDA is calculated before recurring cash charges, including interest expense and taxes, and is not adjusted for capital expenditures or other recurring cash requirements of the business, it should not be considered as a liquidity measure. Non-GAAP financial measures do not reflect a comprehensive system of accounting and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies and/or analysts and may differ from period to period. The Company endeavors to compensate for these limitations by providing the relevant disclosure of the items excluded in the calculation of adjusted EBITDA to net income based on U.S. GAAP, which should be considered when evaluating the Company's results. Tucows strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure.

The Company's adjusted EBITDA definition excludes depreciation, amortization of intangible assets, income tax provision, interest expense, interest income, stock-based compensation, asset impairment, gains and losses from unrealized foreign currency transactions and infrequently occurring items, including acquisition and transitions costs. Gains and losses from unrealized foreign currency transactions removes the unrealized effect of the change in the mark-to-market values on outstanding unhedged foreign currency contracts, as well as the unrealized effect from the translation of monetary accounts denominated in non-U.S. dollars to U.S. dollars.

The following table reconciles net income to adjusted EBITDA (dollars in thousands):

3 months ended December 31                                                                                  12 months ended December 31
                                                                                                              2018                                                 2017                                                   2018                                                 2017
                                                                                                              (unaudited)                                          (unaudited)                                            (unaudited)                                          (unaudited)
Net income for the period                                                                                     4,436                                                11,199                                                 17,135                                               22,327
Depreciation of property and equipment                                                                        1,716                                                1,114                                                  5,722                                                3,727
Amortization of intangible assets                                                                             2,290                                                2,330                                                  9,243                                                8,400
Impairment of intangible assets                                                                               -                                                    110                                                    -                                                    111
Interest expense, net                                                                                         926                                                  865                                                    3,687                                                3,567
Provision for income taxes                                                                                    5,239                                                (1,032                                               ) 9,020                                                1,748
Stock-based compensation                                                                                      670                                                  623                                                    2,574                                                1,457
Unrealized loss (gain) on change in fair value of forward contracts                                           201                                                  54                                                     207                                                  18
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities 752                                                  (45                                                  ) 943                                                  (804                                                 )
Acquisition and transition costs*                                                                             403                                                  58                                                     1,526                                                806
Adjusted EBITDA                                                                                               16,633                                               15,276                                                 50,057                                               41,357
*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.  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 five days (until Monday, February 18), 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, February 26 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) and Enom (http://www.enom.com) manage a combined 23 million domain names and millions of value-added services through a global reseller network of over 37,000 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)
                                                                                                                                                                                                   December 31,                                 December 31,
                                                                                                                                                                                                                        2018                    2017*
                                                                                                                                                                                                   (unaudited)                                  (unaudited)
Assets
Current assets:
Cash and cash equivalents                                                                                                                                                                          $                    12,637                  $                    18,049
Accounts receivable                                                                                                                                                                                                     10,837                                       12,376
Inventory                                                                                                                                                                                                               3,775                                        2,944
Prepaid expenses and deposits                                                                                                                                                                                           15,472                                       14,186
Prepaid domain name registry and ancillary services fees, current portion                                                                                                                                               87,782                                       103,302
Income taxes recoverable                                                                                                                                                                                                1,423                                        3,004
Total current assets                                                                                                                                                                                                    131,926                                      153,861
Prepaid domain name registry and ancillary services fees, long-term portion                                                                                                                                             18,745                                       23,701
Property and equipment                                                                                                                                                                                                  48,065                                       24,620
Contract costs                                                                                                                                                                                                          1,390                                        -
Intangible assets                                                                                                                                                                                                       49,395                                       58,414
Goodwill                                                                                                                                                                                                                90,054                                       90,054
Total assets                                                                                                                                                                                       $                    339,575                 $                    350,650
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable                                                                                                                                                                                   $                    8,445                   $                    7,026
Accrued liabilities                                                                                                                                                                                                     5,899                                        6,412
Customer deposits                                                                                                                                                                                                       11,919                                       15,255
Derivative instrument liability                                                                                                                                                                                         1,276                                        -
Deferred rent, current portion                                                                                                                                                                                          21                                           21
Loan payable, current portion                                                                                                                                                                                           18,400                                       18,290
Deferred revenue, current portion                                                                                                                                                                                       116,734                                      129,155
Accreditation fees payable, current portion                                                                                                                                                                             985                                          1,175
Income taxes payable                                                                                                                                                                                                    1,668                                        1,226
Total current liabilities                                                                                                                                                                                               165,347                                      178,560
Deferred revenue, long-term portion                                                                                                                                                                                     26,960                                       31,427
Accreditation fees payable, long-term portion                                                                                                                                                                           250                                          289
Deferred rent, long-term portion                                                                                                                                                                                        116                                          130
Loan payable, long-term portion                                                                                                                                                                                         46,201                                       58,634
Deferred Gain                                                                                                                                                                                                           -                                            429
Deferred tax liability                                                                                                                                                                                                  20,925                                       19,834
Redeemable non-controlling interest                                                                                                                                                                                     -                                            1,136
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; 10,627,988 shares issued and outstanding as of December 31, 2018 and 10,583,879 shares issued and outstanding as of December 31, 2017                       15,823                                       15,368
Additional paid-in capital                                                                                                                                                                                              3,953                                        2,167
Retained earnings                                                                                                                                                                                                       60,810                                       42,676
Accumulated other comprehensive income                                                                                                                                                                                  (810                 )                       -
Total stockholders' equity                                                                                                                                                                                              79,776                                       60,211
Total liabilities and stockholders' equity                                                                                                                                                         $                    339,575                 $                    350,650
*The Company has initially applied ASC 2014-09 (Topic 606) using the modified retrospective method. Under this method, the comparative information is not restated.
Tucows  Inc.
                                                                                                                                                                                                               Consolidated Statements of Operations
                                                                                                                                                                                                               (Dollar amounts in thousands of U.S. dollars)
                                                                                                                                                                                                                            Three months ended December 31,   Year ended December 31,
                                                                                                                                                                                                                            2018             2017             2018             2017
                                                                                                                                                                                                                            (unaudited)                       (unaudited)
Net revenues                                                                                                                                                                                                   $            85,612         $ 90,621         $ 346,013        $ 329,421
Cost of revenues:
Cost of revenues                                                                                                                                                                                                            53,525           61,112           232,103          230,600
Network expenses (*)                                                                                                                                                                                                        2,256            2,260            9,846            9,324
Depreciation of property and equipment                                                                                                                                                                                      1,601            1,014            5,298            3,142
Amortization of intangible assets                                                                                                                                                                                           499              499              1,996            1,834
Total cost of revenues                                                                                                                                                                                                      57,881           64,885           249,243          244,900
Gross profit                                                                                                                                                                                                                27,731           25,736           96,770           84,521
Expenses:
Sales and marketing (*)                                                                                                                                                                                                     8,434            7,372            33,063           29,423
Technical operations and development (*)                                                                                                                                                                                    2,091            1,855            8,748            7,258
General and administrative (*)                                                                                                                                                                                              4,804            3,468            17,710           13,594
Depreciation of property and equipment                                                                                                                                                                                      115              100              424              585
Amortization of intangible assets                                                                                                                                                                                           1,791            1,831            7,247            6,566
Impairment of indefinite life intangible assets                                                                                                                                                                             -                110              -                111
Loss (gain) on currency forward contracts                                                                                                                                                                                   232              17               254              (98          )
Total expenses                                                                                                                                                                                                              17,467           14,753           67,446           57,439
Income from operations                                                                                                                                                                                                      10,264           10,983           29,324           27,082
Other income (expenses):
Interest expense, net                                                                                                                                                                                                       (926         )   (865         )   (3,687       )   (3,567       )
Other income, net                                                                                                                                                                                                           337              49               518              560
Total other income (expenses)                                                                                                                                                                                               (589         )   (816         )   (3,169       )   (3,007       )
Income before provision for income taxes                                                                                                                                                                                    9,675            10,167           26,155           24,075
Provision for income taxes                                                                                                                                                                                                  5,239            (1,032       )   9,020            1,748
Net income before redeemable non-controlling interest                                                                                                                                                                       4,436            11,199           17,135           22,327
Redeemable non-controlling interest                                                                                                                                                                                         -                (75          )   (26          )   (387         )
Net income attributable to redeemable non-controlling interest                                                                                                                                                              -                75               26               387
Net income for the period                                                                                                                                                                                                   4,436            11,199           17,135           22,327
Other comprehensive income, net of tax
Unrealized income (loss) on hedging activities                                                                                                                                                                              (910         )   (88          )   (1,022       )   550
Net amount reclassified to earnings                                                                                                                                                                                         136              (234         )   212              (650         )
Other comprehensive income (loss) net of tax of $ 241 and $ 183 for the three months ended December 31, 2018 and  December 31, 2017, $ 259 and $ - for the year ended December 31, 2018 and  December 31, 2017              (774         )   (322         )   (810         )   (100         )
Comprehensive income, net of tax for the period                                                                                                                                                                $            3,662          $ 10,877         $ 16,325         $ 22,227
Basic earnings per common share                                                                                                                                                                                $            0.42           $ 1.06           $ 1.62           $ 2.12
Shares used in computing basic earnings per common share                                                                                                                                                                    10,621,181       10,580,429       10,604,722       10,537,356
Diluted earnings per common share                                                                                                                                                                              $            0.41           $ 1.04           $ 1.59           $ 2.07
Shares used in computing diluted earnings per common share                                                                                                                                                                  10,791,940       10,802,817       10,794,170       10,793,622
(*) Stock-based compensation has been included in expenses as follows:
Network expenses                                                                                                                                                                                               $            70             $ 50             $ 223            $ 110
Sales and marketing                                                                                                                                                                                            $            286            $ 255            $ 1,025          $ 573
Technical operations and development                                                                                                                                                                           $            135            $ 145            $ 636            $ 360
General and administrative                                                                                                                                                                                     $            179            $ 173            $ 690            $ 414
The Company has initially applied ASC 2014-09 (Topic 606) 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 December 31,                Year ended December 31,
                                                                                      2018             2017*            2018             2017*
Cash provided by:                                                        (unaudited)                                    (unaudited)
Operating activities:
Net income for the period                                                $            4,436          $ 11,199         $ 17,135         $ 22,327
Items not involving cash:
Depreciation of property and equipment                                                1,716            1,114            5,722            3,727
Loss on write off of property and equipment                                           -                -                -                17
Amortization of debt discount and issuance costs                                      70               69               281              273
Amortization of intangible assets                                                     2,290            2,330            9,243            8,400
Net amortization contract costs                                                       (7           )   -                14               -
Impairment of indefinite life intangible asset                                        -                110              -                111
Deferred income taxes (recovery)                                                      1,899            (326         )   1,038            (3,337       )
Excess tax benefits on share-based compensation expense                               (165         )   (181         )   (697         )   (2,796       )
Amortization of deferred rent                                                         (5           )   -                (14          )   6
Loss on disposal of domain names                                                      271              266              341              291
Other income                                                                          (258         )   (129         )   (429         )   (515         )
Loss (gain) on change in the fair value of forward contracts                          194              54               207              17
Stock-based compensation                                                              670              623              2,574            1,457
Change in non-cash operating working capital:
Accounts receivable                                                                   692              1,340            1,539            1,010
Inventory                                                                             (635         )   5                (831         )   (1,733       )
Prepaid expenses and deposits                                                         (918         )   527              (1,286       )   (1,642       )
Prepaid domain name registry and ancillary services fees                              4,699            3,460            20,476           4,030
Income taxes recoverable                                                              2,398            (2,241       )   2,691            (426         )
Accounts payable                                                                      (877         )   856              171              (3,826       )
Accrued liabilities                                                                   (978         )   (2,269       )   (513         )   (1,275       )
Customer deposits                                                                     34               (78          )   (3,336       )   1,085
Deferred revenue                                                                      (4,798       )   (2,610       )   (16,888      )   4,933
Accreditation fees payable                                                            (60          )   (38          )   (229         )   (238         )
Net cash provided by operating activities                                             10,668           14,081           37,209           31,896
Financing activities:
Proceeds received on exercise of stock options                                        50               48               112              222
Payment of tax obligations resulting from net exercise of stock options               (41          )   (23          )   (445         )   (1,462       )
Proceeds received on loan payable                                                     4,500            -                7,000            86,998
Repayment of loan payable                                                             (4,384       )   (4,572       )   (19,596      )   (19,976      )
Payment of loan payable costs                                                         -                -                (8           )   (620         )
Net cash (used in) provided by financing activities                                   125              (4,547       )   (12,937      )   65,162
Investing activities:
Additions to property and equipment                                                   (8,480       )   (3,474       )   (27,919      )   (12,935      )
Acquisition of a portion of the minority interest in Ting Virginia, LLC               -                -                (1,200       )   (2,000       )
Acquisition of Enom Incorporated, net of cash                                         -                -                -                (76,237      )
Acquisition of intangible assets                                                      (451         )   (558         )   (565         )   (2,942       )
Net cash used in investing activities                                                 (8,931       )   (4,032       )   (29,684      )   (94,114      )
(Decrease) increase in cash and cash equivalents                                      1,862            5,502            (5,412       )   2,944
Cash and cash equivalents, beginning of period                                        10,775           12,547           18,049           15,105
Cash and cash equivalents, end of period                                 $            12,637         $ 18,049         $ 12,637         $ 18,049
Supplemental cash flow information:
Interest paid                                                            $            931            $ 871            $ 3,712          $ 3,587
Income taxes paid, net                                                   $            1,742          $ 1,502          $ 7,112          $ 7,815
Supplementary disclosure of non-cash investing and financing activities:
Property and equipment acquired during the period not yet paid for       $            1,462          $ 214            $ 1,462          $ 214
*The Company has initially applied ASC 2014-09 (Topic 606) 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 December 31,                                           Year ended December 31,
                                                                                                                2018 (unaudited)                    2017 (unaudited)                      2018 (unaudited)                    2017 (unaudited)
Net income for the period                                                                                     $ 4,436                             $ 11,199                              $ 17,135                            $ 22,327
Depreciation of property and equipment                                                                          1,716                               1,114                                 5,722                               3,727
Amortization of intangible assets                                                                               2,290                               2,330                                 9,243                               8,400
Impairment of intangible assets                                                                                 -                                   110                                   -                                   111
Interest expense, net                                                                                           926                                 865                                   3,687                               3,567
Provision for income taxes                                                                                      5,239                               (1,032                            )   9,020                               1,748
Stock-based compensation                                                                                        670                                 623                                   2,574                               1,457
Unrealized loss (gain) on change in fair value of forward contracts                                             201                                 54                                    207                                 18
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities   752                                 (45                               )   943                                 (804                              )
Acquisition and other costs                                                                                     403                                 58                                    1,526                               806
Adjusted EBITDA                                                                                               $ 16,633                            $ 15,276                              $ 50,057                            $ 41,357
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. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.

This release includes forward-looking statements as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995 including statements regarding our expectations regarding our future financial results and, including, without limitation, our expectation regarding our ability to realize synergies from the Enom acquisition and our expectation for growth of Ting Internet. These statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ materially from those described in the forward-looking statements. Information about other potential factors that could affect Tucows' business, results of operations and financial condition is included in the Risk Factors sections of Tucows' filings with the Securities and Exchange Commission. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All forward-looking statements are based on information available to Tucows as of the date they are made. Tucows assumes no obligation to update any forward-looking statements, except as may be required by law.

Tucows, Ting, OpenSRS, Enom and Hover are registered trademarks of Tucows Inc. or its subsidiaries.

Contact:

Lawrence Chamberlain

Loderock Advisors

(416) 519-4196

lawrence.chamberlain@loderockadvisors.com

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