Financial News

Tucows Reports Financial Results for Third Quarter 2020

TORONTO, Nov. 05, 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 third quarter ended September 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.

Note on the Financial Impact of Tucows’ Sale of Ting Mobile Customer Relationships and Transition to Mobile Services Enabler Platform:

As previously announced, effective August 1, 2020 most of Tucows customers relationships were sold to DISH Networks (“DISH”) as part of Tucows’ transition of its mobile business to a Mobile Services Enabler (MSE) model from a Mobile Virtual Network Operator (MVNO) model, under which DISH became Tucows’s first MSE customer. Accordingly, the results of the Mobile Services business in our Network Access segment for the third quarter of 2020 reflect two months of operations under the new MSE model and one month of operations under the previous MVNO model. (All comparative prior-year periods are composed entirely of operations under Tucows’ previous MVNO model.)

Under the terms of the earn out arrangement for the Ting customer base acquired by DISH, the income generated by the customer base acquired by Dish are recognized (net of expenses) as “Other Income” under the heading “Gain on Sale of Ting Customer Assets”. As a result, revenue and gross margin for Mobile Services in the Network Access segment for the third quarter of 2020 are lower than those for the third quarter of 2019. Tucows will recognize fees paid by customers owned by DISH under the Ting brand, as well as customers under DISH’s Boost brand, that are added to Tucows’ MSE platform, as Mobile Platform Services revenue under the terms of the MSE Agreement signed with Dish. For more information, see Tucows’ Financial Statements and Management Discussion and Analysis for the third quarter of 2020.

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

 3 Months ended September 309 Months ended September 30
2020
(Unaudited)
2019
(Unaudited)1
% Change2020
(Unaudited)
2019
(Unaudited)
% Change
Net revenue74,31188,129(15.7%)240,418251,199(4.3%)
Gross Profit19,94127,574(27.7%)68,05774,732(8.9%)
Gain on Sale of Ting Customer Assets21,090-n/a1,090-n/a
Net income7164,205(83.0%)3,7079,620(61.5%)
Basic Net earnings per common share0.070.40(82.5%)0.350.90(61.1%)
Adjusted EBITDA313,27014,832(10.5%)38,12435,7496.6%
Net cash provided by operating activities11,43211,2151.9%34,44427,18526.7%
  1. Tucows financial results for the third quarter of 2019 include the contribution of the bulk sale of domain names in the Company’s Portfolio business (generating $1.9 million in revenue) as part of its exit from that business at the end of the year.
  2. Gain on Sale of Ting Customer Assets for the Third Quarter of 2020, proceeds of $4.6 million under the DISH earn-out arrangement offset by the loss on disposal of Ting Customer Assets totalling $3.5 million.
  3. 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)

   
 RevenueGross Profit
 3 Months ended September 30 3 Months ended September 30
 2020
(Unaudited)
2019
(Unaudited)
2020
(Unaudited)
2019
(Unaudited)
Network Access Services:
Mobile Services    
Retail Mobile Services7,01921,7223,579 10,551 
Mobile Platform Services376-376 - 
Other Professional Services1,457-190 - 
Total Mobile Services8,85221,7224,145 10,551 
     
Fiber Internet Services4,6572,8902,975 1,954 
Total Network Access Services13,50924,6127,120 12,505 
Domain Services:
Wholesale    
Domain Services47,26147,25910,449 8,922 
Value Added Services4,6745,1543,950 4,381 
Total Wholesale51,93552,41314,399 13,303 
     
Retail8,6528,7134,354 4,354 
Portfolio42152,391108 2,211 
Total Domain Services60,80263,51718,861 19,868 
Network Expenses:
Network, other costs--(2,612)(2,254)
Network, depreciation and amortization costs--(3,315)(2,545)
Network, impairment  (113)- 
Total Network expenses--(6,040)(4,799)
     
Total74,31188,12919,941 27,574 

4.  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 third 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. “Revenue and gross margin from our Domains and Ting Internet businesses, excluding the impact of a large bulk domains sale from our Domains Portfolio in the third quarter of last year, increased 2% and 10% year over year, respectively.”

“Our Domains business once again saw strong transaction activity, although softening from the first two quarters of this year, as micro- and small-sized businesses and start-ups continued to establish a web presence for the first time amid the pandemic, while we continued to benefit from our focus on the quality of our customer base for gross margin contribution. In our Mobile Services business, we generated our first fees under our new MSE agreement with DISH and we look forward to increasing that revenue in the future as DISH adds customers under the Ting Mobile brand and we migrate DISH’s Boost customers to the MSE platform. In the Ting Internet business, we achieved another record quarter for capital expenditure on the network, as we continued to add passed addresses, serviceable addresses and new customers, and grow revenue and gross margin.”

Financial Results
  
Net revenue for the third quarter of 2020 was $74.3 million, a decrease of 16% from $88.1 million for the third quarter of 2019. The majority of the decrease was due to the absence of Ting Mobile MVNO revenue for approximately two months of the third quarter of 2020 following the Company’s sale of its Ting Mobile customer relationships to DISH and the related earn out being recognized as Other Income. The decrease was also due to a $1.9 million bulk domain sale from the Domains Portfolio business in the third quarter of 2019 that was not repeated in the third quarter of 2020 as the Company exited its Portfolio business at the end of 2019. Excluding the Mobile Services business, as well as the impact of the bulk Domains sale in the third quarter of 2019, net revenue for the combined Domains and Ting Internet businesses for the third quarter of 2020 increased 2% year over year.

Gross profit for the third quarter of 2020 was $19.9 million, a decrease of 28% from $27.6 million for the third quarter of 2019. The decrease in gross profit is attributable to the same factors as the decline in revenue. Excluding the Mobile Services business, as well as the impact of the bulk Domains sale in the third quarter of 2019, gross margin for the combined Domains and Ting Internet businesses for the third quarter of 2020 increased 10% year over year.

Net income for the third quarter of 2020 was $0.7 million, or $0.07 per share, compared with $4.2 million, or $0.40 per share. Net income was impacted by the one-time $3.5 million non-cash write-down of certain assets related to the sale of the Ting Mobile customer relationships to DISH, which was netted from the $4.6 million Gain on Sale of Ting Customer Assets under Other Income. Excluding the after-tax impact of the write-down, net income would have been $3.4 million, or $0.33 per share, down 19% year over year.

Adjusted EBITDA1 for the third quarter of 2020 was $13.3 million compared with $14.8 million for the third quarter of 2019. Excluding the impact of an outsized Portfolio bulk domain name sale in the third quarter of 2019, Adjusted EBITDA grew 3%.

Cash and cash equivalents at the end of the third quarter of 2020 was $10.2 million compared with $8.9 million at the end of the second quarter of 2020 and $12.0 million at the end of the third 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, loss on disposal of Ting Mobile customer assets, 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 September 309 months ended September 30
 2020 (Unaudited)2019 (Unaudited)2020 (Unaudited)2019 (Unaudited)
Net income for the period 716 4,205 3,707 9,620 
Depreciation of property and equipment3,110 2,348 9,255 6,445 
Impairment of property and equipment113 - 1,638 - 
Loss on disposition of property and equipment- 73 - 73 
Amortization of intangible assets2,645 2,858 8,776 7,463 
Impairment of definite life intangible assets- - 1,431 - 
Disposal of Ting Mobile customer assets3,513 - 3,513 - 
Interest expense, net760 1,263 2,756 3,549 
Accretion of contingent consideration86 - 258 - 
Provision for income taxes840 3,133 2,390 6,209 
Stock-based compensation1,016 830 2,664 2,040 
Unrealized loss (gain) on change in fair value of forward contracts(175)(16)(263)(204)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities81 88 479 (402)
Acquisition and transition costs*565 50 1,520 956 
     
Adjusted EBITDA13,270 14,832 38,124 35,749 
*Acquisition and other costs represent transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to our acquisition of Ascio in March 2019 and Cedar in January 2020 and disposition of certain Ting Mobile assets in August 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 its quarterly financial results news release at 5:05 pm ET on Thursday, November 5, management’s pre-recorded audio commentary (and transcript) discussing the quarter and outlook for the Company, will be posted to the Tucows website at http://www.tucows.com/investors/financials. In lieu of a live question and answer period, for the subsequent five days, until Tuesday, November 10, shareholders, analysts and prospective investors can submit questions to Tucows’ management at ir@tucows.com. Management will post responses to questions of general interest (audio recording and transcript) to the Company’s website at http://www.tucows.com/investors/financials/ on Tuesday, November 17 at approximately 4 pm 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).

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.

     
Tucows Inc.September 30,December 31, 
Consolidated Balance Sheets2020 2019 
(Dollar amounts in thousands of U.S. dollars)(unaudited) (unaudited) 
     
Assets    
     
Current assets:    
Cash and cash equivalents$10,155 $20,393 
Accounts receivable 12,623  14,564 
Inventory 1,139  3,457 
Prepaid expenses and deposits 13,703  13,478 
Derivative instrument asset, current portion 2,402  731 
Prepaid domain name registry and ancillary services fees, current portion 95,694  91,252 
Income taxes recoverable 3,553  1,800 
Total current assets 139,269  145,675 
     
Prepaid domain name registry and ancillary services fees, long-term portion 17,546  17,915 
Property and equipment 109,767  82,121 
Right of use operating lease asset 11,625  11,335 
Contract costs 359  1,400 
Intangible assets 50,087  57,654 
Goodwill 116,270  109,818 
Total assets$444,923 $425,918 
     
     
Liabilities and Stockholders' Equity    
     
Current liabilities:    
Accounts payable$8,552 $6,671 
Accrued liabilities 9,525  9,373 
Customer deposits 14,372  14,074 
Derivative instrument liability 135  - 
Operating lease liability, current portion 1,692  1,413 
Deferred revenue, current portion 128,569  123,101 
Accreditation fees payable, current portion 975  952 
Income taxes payable 881  1,324 
Total current liabilities 164,701  156,908 
     
Derivative instrument liability 112  - 
Deferred revenue, long-term portion 25,661  26,202 
Accreditation fees payable, long-term portion 200  216 
Operating lease liability, long-term portion 9,679  9,424 
Loan payable 113,672  113,503 
Other long-term liability 3,330  - 
Deferred tax liability 27,187  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; 10,593,514 shares issued and outstanding as of September 30, 2020 and 10,585,159 shares issued and outstanding as of December 31, 2019 19,989  16,633 
Additional paid-in capital 983  880 
Retained earnings 78,038  76,208 
Accumulated other comprehensive income (loss) 1,371  473 
Total stockholders' equity 100,381  94,194 
Total liabilities and stockholders' equity$444,923 $425,918 
     


         
Tucows Inc. Three months ended September 30,
 Nine months ended September 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$74,311 $88,129 $240,418 $251,199 
         
Cost of revenues:        
Cost of revenues 48,330  55,756  153,308  162,561 
Network expenses (*) 2,612  2,254  7,513  7,034 
Depreciation of property and equipment 2,985  2,231  8,892  6,070 
Amortization of intangible assets 330  314  1,010  802 
Impairment of property and equipment 113  -  1,638  - 
Total cost of revenues 54,370  60,555  172,361  176,467 
         
Gross profit 19,941  27,574  68,057  74,732 
         
Expenses:        
Sales and marketing (*) 8,318  8,769  26,521  26,366 
Technical operations and development (*) 3,162  2,876  8,980  8,151 
General and administrative (*) 4,868  4,574  15,074  13,818 
Depreciation of property and equipment 125  117  363  375 
Loss on disposition of property and equipment -  73  -  73 
Amortization of intangible assets 2,315  2,544  7,766  6,661 
Impairment of definite life intangible assets -  -  1,431  - 
Loss (gain) on currency forward contracts (159) 20  (99) (90)
Total expenses 18,629  18,973  60,036  55,354 
         
Income from operations 1,312  8,601  8,021  19,378 
         
Other income (expenses):        
Interest expense, net (760) (1,263) (2,756) (3,549)
Gain on sale of Ting Customer Assets, net 1,090  -  1,090  - 
Other income (86) -  (258) - 
Total other income (expenses) 244  (1,263) (1,924) (3,549)
         
Income before provision for income taxes 1,556  7,338  6,097  15,829 
         
Provision for income taxes 840  3,133  2,390  6,209 
Net income for the period 716  4,205  3,707  9,620 
         
Other comprehensive income, net of tax        
Unrealized income (loss) on hedging activities 729  (175) 609  614 
Net amount reclassified to earnings 46  26  289  167 
Other comprehensive income (loss) net of tax expense (income) of $230 and ($47) for the three months ended September 30, 2020 and September 30, 2019 and $261 and $250 for the six months ended September 30, 2020 and September 30, 2019 775  (149) 898  781 
         
Comprehensive income, net of tax for the period$1,491 $4,056 $4,605 $10,401 
         
Basic earnings per common share$0.07 $0.40 $0.35 $0.90 
         
Shares used in computing basic earnings per common share 10,577,731  10,626,754  10,585,785  10,639,544 
         
Diluted earnings per common share$0.07 $0.39 $0.35 $0.89 
         
Shares used in computing diluted earnings per common share 10,682,808  10,745,834  10,679,162  10,798,099 
         
         
         
(*) Stock-based compensation has been included in expenses as follows:        
Network expenses$138 $95 $333 $224 
Sales and marketing$456 $363 $1,203 $857 
Technical operations and development$208 $179 $558 $428 
General and administrative$214 $193 $570 $531 
         


         
Tucows Inc. Three months ended September 30, Nine months ended September 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$716 $4,205 $3,707 $9,620 
         
Items not involving cash:        
Depreciation of property and equipment 3,110  2,348  9,255  6,445 
Loss on write off/impairment of property and equipment 113  120  1,638  142 
Amortization of debt discount and issuance costs 68  64  202  232 
Amortization of intangible assets 2,645  2,858  8,776  7,463 
Net amortization contract costs (15) (61) 109  (8)
Accretion of contingent consideration 86  -  258  - 
Impairment of definite life intangible asset -  -  1,431  - 
Foreign exchange impact of impairment of definite life intangible asset -  -  223  - 
Deferred income taxes (recovery) 180  (170) (927) 1,741 
Excess tax benefits on share-based compensation expense (164) (53) (508) (790)
Net Right of use operating assets/Operating lease liability 137  (54) 249  (5)
Loss on disposal of domain names -  66  15  72 
Loss (gain) on change in the fair value of forward contracts (175) (16) (263) (204)
Disposal of Ting Mobile customer assets 3,513  -  3,513  - 
Stock-based compensation 1,016  830  2,664  2,040 
Change in non-cash operating working capital:        
Accounts receivable 118  (1,763) 2,670  (1,920)
Inventory (123) (644) 1,681  (128)
Prepaid expenses and deposits 2,905  (329) (317) (3,243)
Prepaid domain name registry and ancillary services fees 984  3,819  (4,073) 3,754 
Income taxes recoverable (2,475) 1,576  (1,681) (1,299)
Accounts payable 509  (2,394) 759  (2,778)
Accrued liabilities (668) 3,687  (334) 7,274 
Customer deposits 69  1,394  463  873 
Deferred revenue (1,070) (4,200) 4,927  (2,062)
Accreditation fees payable (47) (68) 7  (34)
Net cash provided by operating activities 11,432  11,215  34,444  27,185 
         
Financing activities:        
Proceeds received on exercise of stock options 632  118  678  312 
Payment of tax obligations resulting from net exercise of stock options (132) (20) (479) (544)
Repurchase of common stock -  (4,986) (3,281) (4,986)
Proceeds received on loan payable -  5,000  -  45,371 
Repayment of loan payable -  3  -  (4,600)
Payment of loan payable costs -  2  (32) (639)
Net cash (used in) provided by financing activities 500  117  (3,114) 34,914 
         
Investing activities:        
Additions to property and equipment (10,636) (10,308) (32,729) (31,157)
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 -  (1,038) (69) (3,566)
Net cash used in investing activities (10,636) (11,346) (41,568) (62,747)
         
Increase (decrease) in cash and cash equivalents 1,296  (14) (10,238) (648)
         
Cash and cash equivalents, beginning of period 8,859  12,003  20,393  12,637 
Cash and cash equivalents, end of period$10,155 $11,989 $10,155 $11,989 
         
Supplemental cash flow information:        
Interest paid$635 $1,267 $2,638 $3,561 
Income taxes paid, net$3,249 $1,959 $5,449 $6,123 
         
Supplementary disclosure of non-cash investing and financing activities:        
Property and equipment acquired during the period not yet paid for$1,697 $991 $1,697 $991 
Fair value of shares issued for acquisition of Cedar Holdings Group$- $- $2,000 $- 
Fair value of contingent consideration for acquisition of Cedar Holdings Group$- $- $3,072 $- 
Acquisition of intangible assets transferred from other assets$- $2,501 $- $- 
         


         
Tucows Inc. Three months ended September 30, Nine months ended September 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$716 $4,205 $3,707 $9,620 
Depreciation of property and equipment 3,110  2,348  9,255  6,445 
Impairment of property and equipment 113  -  1,638  - 
Loss on disposiiton of property and equipment -  73  -  73 
Amortization of intangible assets 2,645  2,858  8,776  7,463 
Disposal of Ting Mobile customer assets 3,513  -  3,513  - 
Impairment of definite life intangible asset -  -  1,431  - 
Interest expense, net 760  1,263  2,756  3,549 
Accretion of contingent consideration 86  -  258  - 
Provision for income taxes 840  3,133  2,390  6,209 
Stock-based compensation 1,016  830  2,664  2,040 
Unrealized loss (gain) on change in fair value of forward contracts (175) (16) (263) (204)
Unrealized loss (gain) on foreign exchange revaluation of foreign denominated monetary assets and liabilities 81  88  479  (402)
Acquisition and other costs1 565  50  1,520  956 
         
Adjusted EBITDA$13,270 $14,832 $38,124 $35,749 
         
1Acquisition and other costs represents transaction-related expenses, transitional expenses, such as duplicative post-acquisition expenses, primarily related to our acquisition of Ascio in March 2019 and Cedar in January 2020 and disposition of certain Ting Mobile assets in August 2020. Expenses include severance or transitional costs associated with department, operational or overall company restructuring efforts, including geographic alignments.    

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