Tucows Reports Financial Results for Second Quarter 2020

TORONTO, Aug. 06, 2020 (GLOBE NEWSWIRE) -- Tucows Inc. (NASDAQ:TCX, TSX:TC), a provider of network access, domain names and other Internet services, today reported its financial results for the second quarter ended June 30, 2020. All figures are in U.S. dollars.

COVID-19: Tucows shareholders and prospective investors are encouraged to read Tucows’ public statement regarding COVID-19, which is available here: https://bit.ly/2LavpOc.

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

	3 Months ended June 30				6 Months ended June 30
	2020 (Un- audited)	2019 (Un- audited)	% Change		2020 (Un- audited)	2019 (Un- audited)	% Change
Net revenue	82,122	84,117	(2.4	%)	166,107	163,070	1.9	%
Gross Profit	22,966	24,507	(6.3	%)	48,116	47,158	2.0	%
Net income1	157	2,616	(94.0	%)	2,991	5,415	(44.8	%)
Basic Net earnings per common share	0.01	0.25	(96.0	%)	0.28	0.51	(45.1	%)
Adjusted EBITDA2	12,175	11,486	6.0	%	24,856	20,917	18.8	%
Net cash provided by operating activities	8,939	6,979	28.1	%	23,012	15,970	44.1	%

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

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

	Revenue		Gross Profit
	3 Months ended June 30		3 Months ended June 30
	2020 (Unaudited)	2019 (Unaudited)	2020 (Unaudited)		2019 (Unaudited)
Network Access Services:
Mobile Services	17,567	20,986	8,907		10,180
Other Services	4,414	2,644	2,749		1,688
Total Network Access Services	21,981	23,630	11,656		11,868
Domain Services:
Wholesale
Domain Services	46,206	46,485	9,852		8,668
Value Added Services	5,034	4,775	4,272		4,037
Total Wholesale	51,240	51,260	14,124		12,705
Retail	8,567	8,783	4,348		4,374
Portfolio3	334	444	204		297
Total Domain Services	60,141	60,487	18,676		17,376
Network Expenses:
Network, other costs	-	-	(2,485	)	(2,385	)
Network, depreciation and amortization costs	-	-	(3,356	)	(2,352	)
Network, impairment			(1,525	)	-
Total Network expenses	-	-	(7,366	)	(4,737	)
Total	82,122	84,117	22,966		24,507

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

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

Financial Results

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

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

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

Cash and cash equivalents at the end of the second quarter of 2020 was $8.9 million compared with $12.4 million at the end of the first quarter of 2020 and $12.0 million at the end of the second quarter of 2019.

Notes:

1. Adjusted EBITDA

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

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

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

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

	3 months ended June 30				6 months ended June 30
	2020 (unaudited)		2019 (unaudited)		2020 (unaudited)		2019 (unaudited)
Net income for the period	157		2,616		2,991		5,415
Depreciation of property and equipment	3,155		2,172		6,145		4,097
Impairment of property and equipment	1,525		-		1,525		-
Amortization of intangible assets	2,830		2,565		6,131		4,605
Impairment of definite life intangible assets	1,431		-		1,431		-
Interest expense, net	846		1,314		1,996		2,286
Accretion of contingent consideration	85		-		172		-
Provision for income taxes	449		1,819		1,550		3,076
Stock-based compensation	847		685		1,648		1,210
Unrealized loss (gain) on change in fair value of forward contracts	(436	)	(70	)	(88	)	(188	)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities	441		(162	)	399		(490	)
Acquisition and transition costs*	845		547		956		906
Adjusted EBITDA	12,175		11,486		24,856		20,917
*Acquisition and other costs represent transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to the Company’s acquisition of Ascio in March 2019, Cedar in January 2020, the shut-down of Roam Mobility in June of 2020 and the costs associated with various DISH agreements executed in August of 2020. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.

Conference Call

Concurrent with the dissemination of this news release, management’s pre-recorded commentary discussing the quarter and outlook for the Company have been posted to the Tucows web site at http://www.tucows.com/investors/financials. In lieu of a live question and answer period, for the next six days (until Wednesday, August 12), shareholders, analysts and prospective investors can submit questions to Tucows’ management at ir@tucows.com. Management will post responses to questions of general interest to the Company’s web site at http://www.tucows.com/investors/financials/ on Monday, August 17 at approximately 4:00 p.m. ET. All questions will receive a response, however, questions of a more specific nature may be responded to directly.

About Tucows

Tucows is a provider of network access, mobile technology services, domain names and other Internet services. Ting Internet (https://ting.com/internet) delivers fixed fiber Internet access with outstanding customer support. Tucows’ mobile services enabler (MSE) platform provides network access, provisioning and billing services for mobile virtual network operators (MVNOs). OpenSRS (https://opensrs.com), Enom (https://www.enom.com) and Ascio (https://ascio.com) combined manage approximately 25 million domain names and millions of value-added services through a global reseller network of over 36,000 web hosts and ISPs. Hover (https://hover.com) makes it easy for individuals and small businesses to manage their domain names and email addresses. More information can be found on Tucows’ corporate website (https://tucows.com).

Tucows Inc.		June 30,			December 31,
Consolidated Balance Sheets			2020			2019
(Dollar amounts in thousands of U.S. dollars)		(unaudited)			(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	8,859		$	20,393
Accounts receivable			7,506			14,564
Inventory			965			3,457
Prepaid expenses and deposits			16,549			13,478
Derivative instrument asset, current portion			1,080			731
Prepaid domain name registry and ancillary services fees, current portion			96,322			91,252
Assets held-for-sale			9,027			-
Income taxes recoverable			1,326			1,800
Total current assets			141,634			145,675
Derivative instrument asset, long-term portion			611			-
Prepaid domain name registry and ancillary services fees, long-term portion			17,902			17,915
Property and equipment			101,292			82,121
Right of use operating lease asset			11,066			11,335
Contract costs			344			1,400
Deferred tax asset			340			-
Intangible assets			52,732			57,654
Goodwill			116,270			109,818
Total assets		$	442,191		$	425,918
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	6,511		$	6,671
Accrued liabilities			9,915			9,373
Customer deposits			14,468			14,074
Derivative instrument liability			561			-
Liabilities held-for-sale			751			-
Operating lease liability, current portion			1,506			1,413
Deferred revenue, current portion			129,072			123,101
Accreditation fees payable, current portion			1,018			952
Income taxes payable			1,291			1,324
Total current liabilities			165,093			156,908
Derivative instrument liability			158			-
Deferred revenue, long-term portion			26,228			26,202
Accreditation fees payable, long-term portion			204			216
Operating lease liability, long-term portion			9,169			9,424
Loan payable, long-term portion			113,608			113,503
Other long-term liability			3,244			-
Deferred tax liability			27,113			25,471
Stockholders' equity:
Preferred stock - no par value, 1,250,000 shares authorized; none issued and outstanding			-			-
Common stock - no par value, 250,000,000 shares authorized; 10,570,360 shares issued and outstanding as of June 30, 2020 and 10,585,159 shares issued and outstanding as of December 31, 2019			18,865			16,633
Additional paid-in capital			591			880
Retained earnings			77,322			76,208
Accumulated other comprehensive income (loss)			596			473
Total stockholders' equity			97,374			94,194
Total liabilities and stockholders' equity		$	442,191		$	425,918

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

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

Tucows Inc.		Three months ended June 30,						Six months ended June 30,
Reconciliation of Net income to Adjusted EBITDA		2020			2019			2020			2019
(Dollar amounts in thousands of U.S. dollars)		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net income for the period	$	157		$	2,616		$	2,991		$	5,415
Depreciation of property and equipment		3,155			2,172			6,145			4,097
Loss on write off/impairment of property and equipment		1,525			-			1,525			-
Amortization of intangible assets		2,830			2,565			6,131			4,605
Impairment of definite life intangible asset		1,431			-			1,431			-
Interest expense, net		846			1,314			1,996			2,286
Accretion of contingent consideration		85			-			172			-
Provision for income taxes		449			1,819			1,550			3,076
Stock-based compensation		847			685			1,648			1,210
Unrealized loss (gain) on change in fair value of forward contracts		(436	)		(70	)		(88	)		(188	)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities		441			(162	)		399			(490	)
Acquisition and other costs1		845			547			956			906
Adjusted EBITDA	$	12,175		$	11,486		$	24,856		$	20,917
1Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to our acquisition of eNom in January 2017, Ascio in March 2019, Cedar in January 2020 and the costs associated with various DISH agreements executed in August of 2020. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.

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

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

Contact:
Lawrence Chamberlain
(416) 519-4196 | lawrence.chamberlain@loderockadvisors.com