Tucows Reports Continuing Strong Financial Results for the Third Quarter of 2015

TORONTO, Nov. 5, 2015 (GLOBE NEWSWIRE) — Tucows Inc. (NASDAQ:TCX) (TSX:TC), a provider of network access, domain names and other Internet services, today reported its financial results for the third quarter ended September 30, 2015. All figures are in U.S. dollars.

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

  3 Months Ended
September 30, 2015 (unaudited)
3 Months Ended
September 30, 2014 (unaudited)
9 Months Ended
September 30, 2015 (unaudited)
9 Months Ended
September 30, 2014 (unaudited)
Net revenue 44,552 38,874 127,909 108,865
         
Adjusted EBITDA1 7,030 4,920 19,280 11,509
Net income2 3,159 2,691 8,278 4,515
Net earnings per common share $0.29 $0.24 $0.75 $0.40
Net cash provided by operating activities 6,783 5,014 11,957 6,110

1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.
2. As the Company expects to exceed its adjusted EBITDA target set for Fiscal 2015 under its overachievement bonus program, net income for the three and nine months ended September 30, 2015 include a provision of $0.2 million and $1.1 million, respectively, to recognize this higher performance.

Summary of Revenues and Cost of Revenues
(In Thousands of US Dollars)

  Revenue Cost of Revenue
 
 
3 Months Ended
September 30, 2015 (unaudited)
3 Months Ended
September 30, 2014 (unaudited)
3 Months Ended
September 30, 2015 (unaudited)
3 Months Ended
September 30, 2014 (unaudited)
Domain Services        
Wholesale        
OpenSRS Domain Service 21,137 21,880 17,613 18,230
Value-Added Services 2,405 2,350 357 576
Total Wholesale 23,542 24,230 17,970 18,806
Retail 3,154 2,687 1,427 1,197
Portfolio 1,315 2,2083 172 189
Total Domain Services 28,011 29,125 19,569 20,192
Network Access Services 16,541 9,749 9,211 5,794
         
Network, other costs 1,421 1,139
Network, depreciation and amortization costs 336 172
Total revenue/cost of revenue 44,552 38,874 30,537 27,297

3. Portfolio revenue for Q3 2014 includes the net amounts received from the previously announced confidential arrangements related to the Company’s withdrawal of its application under the ICANN New gTLD Program for .group.

“Continuing solid performance from our Domains business and increasing contribution from Ting Mobile resulted in a record quarter for both revenue and adjusted EBITDA1,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “The operating leverage in our business model contributed to 43% year-over-year growth in adjusted EBITDA for the quarter to a record $7.0 million, bringing our total for the first nine months of the year to $19.3 million, representing 68% growth from the same period last year and well above our total for all of 2014.”

Mr. Noss added, “We remain committed to returning to capital to our shareholders as we pursue sustainable long-term growth and during the third quarter invested nearly $10.0 million in the repurchase of our shares through our buyback program.”

Net revenue for the third quarter of 2015 increased 15% to $44.6 million from $38.9 million for the third quarter of 2014.

Adjusted EBITDA1 for the third quarter of 2015 increased 43% to $7.0 million from $4.9 million for the third quarter of 2014. Net income for the third quarter of 2015 increased to $3.2 million, or $0.29 per share, compared with $2.7 million, or $0.24 per share, for the third quarter of 2014.

Cash and cash equivalents at the end of the third quarter of 2015 were $11.9 million compared with $15.3 million at the end of the second quarter of 2015 and $13.6 million at the end of the third quarter of 2014. The decrease relative to the second quarter of 2015 is primarily the result of the Company’s use of $10.0 million during the third quarter of this year to repurchase 398,000 shares of its common stock under its ongoing share buyback program, as well as $0.7 million to acquire additional property and equipment, the majority of which was investment in expanding Ting Internet’s fiber footprint. These were partially offset by the generation of cash flow from operating activities during the quarter of $6.8 million.

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 and to project our future earnings and cash flows, we typically disclose and discuss a non-GAAP financial measure, Adjusted EBITDA, on investor conference calls and related events that exclude non-cash and other charges as we believe that the non-GAAP information enhances investors’ overall understanding of our financial performance and the comparability of our operating results from period to period.

Adjusted EBITDA is one of the primary measures we use for planning and budgeting purposes, incentive compensation and to monitor and evaluate our financial and operating results. Since adjusted EBITDA is a non-GAAP financial performance measure, our calculation of adjusted EBITDA may be susceptible to varying calculations; 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 measure of discretionary cash available to invest in the growth of the business. See the Consolidated Statements of Cash Flows included in the attached financial statements. Non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same captions 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. However, the Company’s management compensates 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.

Adjusted EBITDA excludes depreciation expense, amortization of intangibles, income tax provision, interest expense, interest income, stock-based compensation, asset impairment, net deferred revenue, which comprises the change in deferred revenue, net of prepaid domain name registry and other Internet services fees, to reflect the material amount of cash we collect and pay for domain registrations and other Internet services at the time of activation, unrealized foreign exchange gain/loss from the translation of monetary accounts denominated in non U.S. dollars to U.S. dollars as well as the revaluation of foreign exchange contracts and our foreign denominated assets and liabilities and infrequently occurring items listed in the itemized reconciliations between GAAP and non-GAAP financial measures included in this press release.

Conference Call

Tucows management will host a conference call today, Thursday, November 5, 2015 at 5:00 p.m. (ET) to discuss the Company’s third quarter 2015 results. Participants can access the conference call by dialing 1-888-231-8191 or 647-427-7450 or via the Internet at http://www.tucows.com/investors.

For those unable to participate in the conference call at the scheduled time, it will be archived for replay both by telephone and via the Internet beginning approximately one hour following completion of the call. To access the archived conference call by telephone, dial 416-849-0833 or 1-855-859-2056 and enter the passcode 61908554 followed by the pound key. The telephone replay will be available until Thursday, November 12, 2015 at midnight. To access the archived conference call as an MP3 via the Internet, go to http://www.tucows.com/investors.

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) manages over thirteen million domain names and millions of value-added services through a global reseller network of over 13,000 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).

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, in particular, our expectations for Ting and its impact on our financial performance. 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, including the acceptance of Ting in the market. 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® is a registered trademark of Tucows Inc. or its subsidiaries. All other trademarks and service marks are the properties of their respective owners.

     
Tucows Inc.
Consolidated Balance Sheets
(Dollar amounts in U.S. dollars)
     
  September 30, December 31,
  2015 2014
  (unaudited)  
     
Assets    
     
Current assets:    
Cash and cash equivalents  $ 11,898,360  $ 8,271,377
Accounts receivable 7,946,089 6,789,685
Inventory 742,460 393,774
Prepaid expenses and deposits 4,677,841 3,697,292
Prepaid domain name registry and ancillary services fees, current portion 47,060,627 44,614,858
Other assets 8,199,000
Deferred tax asset, current portion 3,767,702 2,498,196
Income taxes recoverable 15,611 997
Total current assets 76,108,690 74,465,179
     
Prepaid domain name registry and ancillary services fees, long-term portion 11,387,867 11,764,765
Property and equipment 6,472,226 1,609,787
Deferred tax asset, long-term portion 5,151,914 4,880,423
Intangible assets 14,678,989 14,202,585
Goodwill 21,005,143 18,873,127
Total assets  $ 134,804,829  $ 125,795,866
     
     
Liabilities and Stockholders’ Equity    
     
Current liabilities:    
Accounts payable  $ 3,965,083  $ 3,579,920
Accrued liabilities 5,681,783 3,941,549
Customer deposits 4,714,950 4,461,727
Derivative instrument liability 2,005,634 1,115,805
Deferred rent, current portion 15,139
Loan payable, current portion 3,500,000
Deferred revenue, current portion 59,077,575 55,495,566
Accreditation fees payable, current portion 485,491 466,201
Income taxes payable 2,423,520 473,480
Total current liabilities 81,869,175 69,534,248
     
Derivative instrument liability, long-term portion 175,734
Deferred revenue, long-term portion 15,336,127 15,610,753
Accreditation fees payable, long-term portion 120,378 128,243
Deferred rent, long-term portion 95,656 92,878
Other liabilities 1,545,832
Deferred tax liability, long-term portion 4,974,814 4,787,351
     
Redeemable non-controlling interest 3,024,349
     
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;10,727,380 shares issued and outstanding as of September 30, 2015 and 11,329,732 shares issued and outstanding as of December 31, 2014 14,160,189 14,130,059
Additional paid-in capital 13,397,142 29,090,058
Deficit 1,298,763 (6,955,283)
Accumulated other comprehensive income (loss) (1,193,330) (622,441)
Total stockholders’ equity 27,662,764 35,642,393
Total liabilities and stockholders’ equity  $ 134,804,829  $ 125,795,866
         
Tucows Inc.
Consolidated Statements of Operations
(Dollar amounts in U.S. dollars)
         
  Three months ended September 30, Nine months ended September 30,
  2015 2014 2015 2014
  (unaudited) (unaudited)
         
Net revenues  $ 44,551,909  $ 38,874,183  $ 127,908,962  $ 108,864,578
         
Cost of revenues:        
Cost of revenues  28,779,882  25,985,875  83,851,928  75,038,518
Network expenses (*)  1,421,279  1,139,515  4,138,213  3,427,856
Depreciation of property and equipment  324,166  172,019  803,737  528,956
Amortization of intangible assets  11,532  —   26,988  — 
Total cost of revenues 30,536,859 27,297,409 88,820,866 78,995,330
         
Gross profit 14,015,050 11,576,774 39,088,096 29,869,248
         
Expenses:        
Sales and marketing (*)  4,740,662  3,593,486  13,387,800  11,377,701
Technical operations and development (*)  1,101,581  1,041,136  3,405,052  3,238,566
General and administrative (*) (note 1)  2,607,916  2,727,626  7,826,405  6,959,984
Depreciation of property and equipment  63,790  58,685  185,074  167,527
Amortization of intangible assets  56,997  107,230  167,209  545,290
Impairment of indefinite life intangible assets  18,550  —   68,848  577,145
Loss on currency forward contracts  352,738  150,227  681,988  219,904
Total expenses 8,942,234 7,678,390 25,722,376 23,086,117
         
Income from operations 5,072,816 3,898,384 13,365,720 6,783,131
         
Other income (expenses):        
Interest expense, net (78,959) (63,498) (161,136) (206,679)
Total other income (expenses) (78,959) (63,498) (161,136) (206,679)
         
Income before provision for income taxes 4,993,857 3,834,886 13,204,584 6,576,452
         
Provision for income taxes 1,834,400 1,143,981 4,926,189 2,061,526
Net income 3,159,457 2,690,905 8,278,395 4,514,926
         
         
Redeemable non-controlling interest  (91,283)  —   (162,750)  — 
         
Net (earnings) loss attributable to redeemable non-controlling interest  91,283  —   162,750  — 
         
Net income 3,159,457 2,690,905 8,278,395 4,514,926
         
Other comprehensive income (loss), net of tax        
Unrealized loss on hedging activities (724,336) (437,519) (1,723,248) (602,901)
Net amount reclassified to earnings 364,330 57,701 1,152,359 437,893
Other comprehensive income (loss) net of tax of $198,664 and $197,852 for the three months ended September 30, 2015 and September 30, 2014 and $334,280 and $85,955 for the nine months ended September 30, 2015 and September 30, 2014 (360,006) (379,818) (570,889) (165,008)
         
Comprehensive income, net of tax for the period $ 2,799,451 $ 2,311,087 $ 7,707,506 $ 4,349,918
         
Basic earnings per common share $ 0.29 $ 0.24 $ 0.75 $ 0.40
         
Shares used in computing basic earnings per common share 10,984,869 11,321,175 11,057,634 11,190,684
         
Diluted earnings per common share $ 0.28 $ 0.23 $ 0.72 $ 0.39
         
Shares used in computing diluted earnings per common share 11,372,682 11,787,749 11,469,657 11,718,910
         
         
         
(*) Stock-based compensation has been included in expenses as follows:        
Network expenses $ 7,221 $ 6,600 $ 22,264 $ 22,397
Sales and marketing $ 45,385 $ 37,637 $ 144,408 $ 104,440
Technical operations and development $ 27,364 $ 22,716 $ 84,646 $ 59,368
General and administrative $48,605 $ 163,759 $ 126,910 $ 230,841
         
Tucows Inc.
Consolidated Statements of Cash Flows
(Dollar amounts in U.S. dollars)
         
  Three months ended September 30, Nine months ended September 30,
  2015 2014 2015 2014
Cash provided by: (unaudited) (unaudited)
Operating activities:        
Net income for the period $ 3,159,457 $ 2,690,905 $ 8,278,395 $ 4,514,926
Items not involving cash:        
Depreciation of property and equipment 387,956 230,704 988,811 696,483
Amortization of intangible assets 68,529 107,230 194,197 545,290
Impairment of indefinite life intangible asset 18,550 68,848 577,145
Deferred income taxes recovery (53,085) (49,214) (1,019,254) (807,691)
Excess tax benefits from share-based compensation expense 168,346 (250,555)
Amortization of deferred rent 7,370 1,832 17,917 14,212
Disposal of domain names 2,866 10,708 20,551 19,577
Loss on change in the fair value of forward contracts 99,052 125,305 160,394 19,991
Stock-based compensation 128,575 230,712 378,228 417,046
Change in non-cash operating working capital:        
Accounts receivable 262,149 4,440 (994,889) (1,609,287)
Inventory (123,047) 90,114 (281,491) (81,340)
Prepaid expenses and deposits 1,000,287 613,342 (892,105) (13,192)
Prepaid domain name registry and ancillary services fees 149,905 573,727 (2,068,871) (1,848,171)
Income taxes recoverable 1,152,410 (227,558) 1,935,426 (794,101)
Accounts payable 195,002 326,610 202,578 1,130,552
Accrued liabilities 406,920 1,214,237 1,517,453 1,044,866
Customer deposits (199,695) (418,539) 253,223 (431,614)
Deferred revenue 140,850 (656,430) 3,185,946 2,959,948
Accreditation fees payable (20,621) (22,510) 11,425 5,822
Net cash provided by operating activities 6,783,430 5,013,961 11,956,782 6,109,907
         
Financing activities:        
Proceeds received on exercise of stock options 189,914 343,953 737,369 1,385,816
Excess tax benefits from share-based compensation expense 312,091 741,512 1,400,793 1,755,312
Repurchase of common stock (9,977,495) (1,099,571) (18,179,176) (1,181,857)
Proceeds received on loan payable 3,500,000
Repayment of loan payable (5,358,333) (6,300,000)
Net cash used in financing activities (9,475,490) (5,372,439) (12,541,014) (4,340,729)
         
Investing activities:        
Additions to property and equipment (710,342) (216,794) (2,051,124) (598,820)
Gross proceeds from the waiver of rights to .online registry 6,619,832
Additional cost of acquisition of Ting Virginia, LLC., net of cash of $21,423 (357,493)
Net cash provided by (used in) investing activities (710,342) (216,794) 4,211,215 (598,820)
         
Increase (decrease) in cash and cash equivalents (3,402,402) (575,272) 3,626,983 1,170,358
         
Cash and cash equivalents, beginning of period  15,300,762  14,164,518  8,271,377  12,418,888
Cash and cash equivalents, end of period $ 11,898,360 $ 13,589,246 $ 11,898,360 $ 13,589,246
         
Supplemental cash flow information:        
Interest paid $ 78,988 $ 64,248 $ 175,290 $ 207,634
Income taxes paid, net $ 512,954 $ 469,248 $ 2,457,225 $ 1,724,976
         
Supplementary disclosure of non-cash investing activity:        
Property and equipment acquired during the period not yet paid for $ 63,499 $ 82,132 $ 63,499 $ 82,132
         
Tucows Inc.
Reconciliation of Net income to Adjusted EBITDA
(In Thousands of US Dollars)
         
  Three months ended September 30, Nine months ended September 30,
  2015 2014 2015 2014
  (unaudited) (unaudited)
         
Net income for the period $ 3,159 $ 2,691 $ 8,278 $ 4,515
Depreciation of property and equipment  388  231  989  696
Amortization of intangible assets  69  107  194  545
Impairment of indefinite life intangible assets  19  —   69  577
Interest expense, net  79  63  161  207
Provision for income taxes  1,834  1,144  4,926  2,062
Change in net deferred revenue 1  289 15  1,181  1,183
Stock-based compensation  129  231  378  417
Loss on currency forward contracts  1,065  468  3,104  1,307
         
Adjusted EBITDA $ 7,031 $ 4,920 $ 19,280 $ 11,509
         
(1) Net deferred revenue comprises the change in deferred revenue, net of prepaid domain name registry and other Internet services fees, to reflect the material amount of cash we collect and pay for domain registrations and other Internet services at the time of activation. Net deferred revenue for the nine months ended September 30, 2015, includes a benefit of $0.1 million as a result of the translation of deferred revenue and prepaid domain name registry and other Internet services fees to our reporting currency of US dollars.
CONTACT: Lawrence Chamberlain
         NATIONAL Equicom
         (416) 848-1457
         lchamberlain@national.ca

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