OREANDA-NEWS. 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, 2016. All figures are in U.S. dollars.

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

     
  3 Months Ended June 30 6 Months Ended June 30
2016
(Unaudited)		 2015
(Unaudited)		 % Change 2016
(Unaudited)		 2015
(Unaudited)		 % Change
Net revenue 47,466 42,889   11 % 93,077 83,357   12 %
Net income 4,071 2,285   78 % 8,509 5,119   66 %
Net earnings per common share 0.39 0.21   86 % 0.80 0.46   74 %
Adjusted EBITDA1 7,112 4,349   64 % 13,925 9,641   44 %
Net cash provided by operating activities 2,173 2,236   -3 % 7,727 5,173   49 %
                     
  1. This Non-GAAP financial measure is described below and reconciled to GAAP net income in the accompanying table.  Tucows has revised its definition of Adjusted EBITDA as detailed in the description below and the table reconciling Adjusted EBITDA to GAAP net income.

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

     
  Revenue Gross Margin
  3 Months ended June 30 3 Months ended June 30
  2016
(Unaudited)		 2015
(Unaudited)		 2016
(Unaudited)		 2015
(Unaudited)
Network Access Services:
Mobile Services 18,026 14,352   8,646     6,356  
Other Services 972 1,066   443     564  
Total Network Access Services 18,999 15,418   9,089     6,919  
         
Domain Services:
Wholesale        
Domain Services 21,699 21,287   4,053     3,542  
Value Added Services 2,310 2,356   1,858     1,854  
Total Wholesale 24,008 23,643   5,911     5,396  
         
Retail 3,556 3,009   1,916     1,687  
Portfolio 903 819   700     636  
Total Domain Services 28,468 27,471   8,528     7,719  
         
Network Expenses:
Network, other costs ? ?   (1,405 )   (1,495 )
Network, depreciation and amortization costs ? ?   (362 )   (291 )
Total Network expenses ? ?   (1,767 )   (1,786 )
         
Total revenue/gross margin 47,466 42,889   15,850     12,852  
                 

“Tucows delivered another solid quarter of financial performance, driven by growth in both Network Access and Domain Services as we continue to benefit from the significant operating leverage in our business,” said Elliot Noss, President and Chief Executive Officer.  “Overall revenue grew 11% year-over-year, while net income was 78% higher at $4.1 million, or $0.39 per share and adjusted EBITDA1 was up 64% to $7.1 million.”

“Ting Mobile powered another great financial quarter and the acquisition and successful integration of Melbourne IT’s international wholesale domain reseller channel punctuated another quarter of steady contribution from our Domain Services business. While these core services continue to drive earnings, in our Ting Internet service we are steadily gaining experience, serviceable addresses, brand awareness and glowing reviews in Charlottesville, Virginia and Westminster, Maryland and we are getting ready to begin construction in Holly Springs, North Carolina.”

“All in, it was a good quarter for both the present and the future.”

Net revenue for the second quarter of 2016 increased 11% to $47.5 million from $42.9 million for the second quarter of 2015.

Net income for the second quarter of 2016 increased to $4.1 million, or $0.39 per share, compared with $2.3 million, or $0.21 per share, for the second quarter of 2015.  Adjusted EBITDA1 for the second quarter of 2016 increased to $7.1 million from $4.3 million for the second quarter of 2015.

Cash and cash equivalents at the end of the second quarter of 2016 was $5.9 million compared with $10.0 million at the end of the first quarter of 2016 and $15.3 million at the end of the second quarter of 2015. The decrease relative to the first quarter of 2016 was primarily the result of the purchase of 209,698 shares of common stock for $5.0 million under the Company’s open market share buyback program, further investment of $1.0 million in property and equipment, primarily for the continued build out of the Ting Internet footprint, and repayment of $0.2 million of its bank loan.  These decreases were offset by cash provided by operating activities of $2.2 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, the Company typically disclose and discuss a non-GAAP financial measure, adjusted EBITDA, 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 current 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. 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 Company’s current adjusted EBITDA definition is the result of two revisions:

  • In response to the clarification guidance provided by the SEC Compliance & Disclosure Interpretations regarding Non-GAAP Measures, updated on May 17, 2016, the Company revised its definition of adjusted EBITDA to eliminate the adjustment for the effect of net deferred revenue.  Prior to this quarter of 2016, the Company’s adjusted EBITDA definition included an adjustment which removed the effect of net deferred revenue, which comprised the change in deferred revenue, net of prepaid domain name registry and other Internet services fees.
     
  • As previously disclosed, in April 2016, as part of the Company’s assessment of its compensation program for 2016, the Company revised the definition of adjusted EBITDA to eliminate the adjustment for the effect of realized gains/losses from all foreign currency contracts, both hedged and unhedged as the Company believes it is able to manage realized gains/losses from all foreign currency contracts with proper planning and budgeting.  The Company used this version of adjusted EBITDA definition in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016.

The current adjusted EBITDA definition will be used to assess Company performance for 2016 and future periods.

In accordance with the clarification guidance provided by the SEC Compliance & Disclosure Interpretations, Non-GAAP Measures updated on May 17, 2016, prior period Adjusted EBITDA amounts presented herein have been recast to reflect the above described revisions.

 

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 nearly 15 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, including, without limitation, our expectation regarding our ability to manage realized gains/losses from foreign currency contracts. 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® 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)
         
    June 30,   December 31,
    2016   2015
    (unaudited)   (unaudited)
         
Assets        
         
Current assets:        
Cash and cash equivalents   $ 5,879,482     $ 7,723,253  
Accounts receivable     9,982,919       7,171,388  
Inventory     1,284,692       903,775  
Prepaid expenses and deposits     6,427,664       5,067,790  
Derivative instrument asset, current portion     73,617       -  
                 
Prepaid domain name registry and ancillary services fees, current portion     48,350,997       44,708,041  
Income taxes recoverable     1,326,355       2,292,915  
Total current assets     73,325,726       67,867,162  
         
Prepaid domain name registry and ancillary services fees, long-term portion     11,296,936       11,040,929  
Property and equipment     7,939,984       7,126,676  
Deferred tax asset     6,339,848       7,621,092  
Other assets     133,500       -  
Intangible assets     20,317,568       14,469,677  
Goodwill     21,005,143       21,005,143  
Total assets   $ 140,358,705     $ 129,130,679  
         
         
Liabilities and Stockholders' Equity        
         
Current liabilities:        
Accounts payable   $ 3,312,273     $ 4,166,135  
Accrued liabilities     5,008,112       5,855,686  
Customer deposits     6,171,458       5,136,909  
Derivative instrument liability     294,170       2,027,086  
Deferred rent, current portion     20,854       19,463  
Loan payable, current portion     9,062,500       3,500,000  
Deferred revenue, current portion     61,337,998       56,646,390  
Accreditation fees payable, current portion     505,175       465,300  
Income taxes payable     667,773       444,053  
Total current liabilities     86,380,313       78,261,022  
         
Deferred revenue, long-term portion     15,362,403       14,947,639  
Accreditation fees payable, long-term portion     115,761       118,480  
Deferred rent, long-term portion     116,137       100,864  
Other liabilities     1,202,320       1,459,960  
Deferred tax liability     4,843,153       4,876,691  
         
Redeemable non-controlling interest     3,061,244       3,036,598  
         
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;10,422,453 shares issued and outstanding as of June 30, 2016 and 10,685,599 shares issued and outstanding as of December 31, 2015     14,295,907       14,530,633  
Additional paid-in capital     2,234,541       8,526,395  
Retained earnings     12,866,227       4,381,849  
Accumulated other comprehensive income (loss)     (119,301 )     (1,109,452 )
Total stockholders' equity     29,277,374       26,329,425  
Total liabilities and stockholders' equity   $ 140,358,705     $ 129,130,679  
         
Tucows  Inc.  
Consolidated Statements of Operations  
(Dollar amounts in U.S. dollars)  
                 
    Three months ended
June 30,
    Six months ended
June 30, 
    2016   2015   2016   2015
                                 
    (unaudited)   (unaudited)
                 
Net revenues $   47,466,381    $   42,889,220    $   93,076,794   $   83,357,053  
                 
Cost of revenues:                
Cost of revenues     29,849,661       28,250,672       58,700,134       55,072,046  
Network expenses (*)     1,404,826       1,494,838       2,637,757       2,716,934  
Depreciation of property and equipment     350,920       279,929       697,673       479,571  
Amortization of intangible assets     11,532       11,532       23,064       15,456  
Total cost of revenues     31,616,939       30,036,971       62,058,628       58,284,007  
                 
Gross profit     15,849,442       12,852,249       31,018,166       25,073,046  
                 
Expenses:                
Sales and marketing (*)     5,435,033       4,847,963       10,720,657       8,647,138  
Technical operations and development (*)     998,651       1,189,276       2,175,011       2,303,471  
General and administrative (*)     2,926,608       2,750,466       5,331,535       5,218,488  
Depreciation of property and equipment     76,922       62,022       150,190       121,284  
Amortization of intangible assets     276,918       56,997       333,915       110,212  
Impairment of indefinite life intangible assets     3,894       37,805       24,879       50,298  
Loss (gain) on currency forward contracts     (8,711 )     25,227       (119,468 )     329,251  
Total expenses     9,709,315       8,969,756       18,616,719       16,780,142  
                 
Income from operations     6,140,127       3,882,493       12,401,447       8,292,904  
                 
Other income (expenses):                
Interest expense, net     (120,528 )     (57,402 )     (166,700 )     (82,177 )
Other income     128,820       -       257,640       -  
Total other income (expenses)     8,292       (57,402 )     90,940       (82,177 )
                 
Income before provision for income taxes     6,148,419       3,825,091       12,492,387       8,210,727  
                 
Provision for income taxes     2,077,633       1,540,096       3,983,363       3,091,789  
Net income     4,070,786       2,284,995       8,509,024       5,118,938  
                 
                 
Redeemable non-controlling interest     (273,690 )     (49,985 )     (444,482 )     (71,467 )
                 
Net (earnings) loss attributable to redeemable non-controlling interest     273,690       49,985       444,482       71,467  
                 
Net income     4,070,786       2,284,995       8,509,024       5,118,938  
                 
Other comprehensive income (loss), net of tax                
Unrealized loss on hedging activities     27,264       (38,046 )     575,227       (998,912 )
Net amount reclassified to earnings     79,367       371,955       414,924       788,029  
                                 
Other comprehensive income (loss) net of tax of $60,659 and $184,262 for the three months ended June 30, 2016 and June 30, 2015 and  $544,363 and $135,616 for the six months ended June 30, 2016 and June 30, 2015     106,631       333,909       990,151       (210,883 )
                 
Comprehensive income, net of tax for the period $   4,177,417   $   2,618,904   $   9,499,175   $   4,908,055  
                                 
Basic earnings per common share $   0.39   $   0.21   $   0.80   $   0.46  
                 
Shares used in computing basic earnings per common share     10,541,659       11,047,136       10,607,843       11,094,618  
                 
Diluted earnings per common share $   0.38   $   0.20   $   0.79   $   0.44  
                 
Shares used in computing diluted earnings per common share     10,733,860       11,456,670       10,797,458       11,518,105  
                 
                 
                 
(*) Stock-based compensation has been included in expenses as follows:                
Network expenses $   5,069   $   8,020   $   11,864   $   15,043  
Sales and marketing $   60,385   $   48,528   $   115,263   $   99,023  
Technical operations and development $   25,003   $   28,904   $   51,401   $   57,282  
General and administrative $   99,730   $   39,153   $   211,887   $   78,305  
                 
Tucows  Inc.  
Consolidated Statements of Cash Flows  
(Dollar amounts in U.S. dollars)  
                 
    Three months ended June 30, 
    Six months ended June 30, 
      2016       2015       2016       2015  
                                 
Cash provided by:   (unaudited)   (unaudited)
Operating activities:                
Net income for the period $   4,070,786   $   2,284,995   $   8,509,024   $   5,118,938  
Items not involving cash:                
Depreciation of property and equipment     427,842       341,951       847,863       600,855  
Amortization of intangible assets     288,450       68,529       356,979       125,668  
Impairment of indefinite life intangible asset     3,894       37,805       24,879       50,298  
Deferred income taxes recovery     430,184       (801,919 )     703,343       (966,169 )
Amortization of deferred rent     4,749       13,039       16,664       10,547  
Disposal of domain names     12,601       11,357       20,821       17,685  
Other income     (128,820 )     -       (257,640 )     -  
Loss  (gain) on change in the fair value of forward contracts     (28,977 )     (97,451 )     (272,019 )     61,342  
Stock-based compensation     190,187       124,605       390,415       249,653  
Change in non-cash operating working capital:                
Accounts receivable     (1,921,021 )     (1,088,453 )     (2,811,531 )     (1,257,038 )
Inventory     (141,830 )     (45,294 )     (380,917 )     (158,444 )
Prepaid expenses and deposits     (1,106,950 )     (592,614 )     (1,359,874 )     (1,892,392 )
Prepaid domain name registry and ancillary services fees     (3,101,043 )     (755,932 )     (3,898,963 )     (2,218,776 )
Income taxes recoverable     (36,174 )     121,248       1,190,280       783,016  
Accounts payable     (1,233,092 )     (109,990 )     (683,296 )     7,576  
Accrued liabilities     (396,328 )     1,169,753       (847,574 )     1,110,533  
Customer deposits     1,214,472       589,361       1,034,549       452,918  
Deferred revenue     3,597,790       983,586       5,106,372       3,045,096  
Accreditation fees payable     26,537       (18,981 )     37,156       32,046  
Net cash provided by operating activities     2,173,257       2,235,595       7,726,531       5,173,352  
                 
Financing activities:                
Proceeds received on exercise of stock options     37,209       299,472       56,767       547,455  
                                 
Payment of tax obligations resulting from net exercise of stock options     (203,019 )     -       (239,704 )     -  
Excess tax benefits from share-based compensation expense     384,839       676,060       446,199       1,088,702  
Repurchase of common stock     (4,999,978 )     (489,536 )     (7,180,257 )     (8,201,681 )
Proceeds received on loan payable     -       -       6,000,000       3,500,000  
Repayment of  loan payable     (218,750 )     -       (437,500 )     -  
Payment of credit facility renegotiation costs     (133,500 )     -       (133,500 )     -  
Net cash provided by (used in) financing activities     (5,133,199 )     485,996       (1,487,995 )     (3,065,524 )
                 
Investing activities:                
Additions to property and equipment     (975,401 )     (1,149,020 )     (1,831,737 )     (1,340,782 )
Gross proceeds from the waiver of rights to .online registry     -       -       -       6,619,832  
Remaining payment for the acquisition of Ting Virginia, LLC., net of cash of $21,423     -       50,000       -       (357,493 )
Acquisition of intangible assets     (196,024 )     -       (6,250,570 )     -  
Net cash provided by (used in) investing activities     (1,171,425 )     (1,099,020 )     (8,082,307 )     4,921,557  
                 
Increase in cash and cash equivalents     (4,131,367 )     1,622,571       (1,843,771 )     7,029,385  
                 
Cash and cash equivalents, beginning of period     10,010,849       13,678,191       7,723,253       8,271,377  
Cash and cash equivalents, end of period $   5,879,482   $   15,300,762   $   5,879,482   $   15,300,762  
                 
Supplemental cash flow information:                
Interest paid $   120,566   $   57,409   $   166,947   $   96,302  
Income taxes paid, net $   1,274,739   $   1,380,448   $   1,591,959   $   1,944,470  
                 
Supplementary disclosure of non-cash investing activity:                
Property and equipment acquired during the period not yet paid for $   46,632   $   70,577   $   46,632   $   70,577