Tucows Reports Financial Results for the First Quarter of 2014

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May 14, 2014, 04:00 ET

- Ting Continues Strong Momentum in Customer and Device Additions/Domains Business Delivers Another Quarter of Solid Performance -

TORONTO, May 14, 2014 /PRNewswire/ - Tucows Inc. (NASDAQ:TCX, TSX:TC), a global provider of domain names and other Internet services, today reported its financial results for the first quarter ended March 31, 2014. All figures are in U.S. dollars.

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

	3 Months Ended Mar. 31, 2014 (unaudited)	3 Months Ended Mar. 31, 2013 (unaudited)
Net revenue	34,402	29,985
Income before provision for income taxes and change in fair value of forward exchange contracts	1,280	431
Net income	477	77
Net earnings per common share¹	$0.04	$0.01
Net cash provided by (used in) operating activities	(39)²	416

Net earnings per common share reflects the 1-for-4 reverse split of common shares that became effective December 31, 2013.
Net cash used in operating activities includes an excess tax benefit from share-based compensation expenses of $1.0 million in Q1 2014. Net cash provided by financing activities in Q1 2014 reflects the excess tax benefit as a corresponding in-flow.

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

	Revenue	Revenue	Cost of Revenue	Cost of Revenue
	3 Months Ended Mar. 31, 2014 (unaudited)	3 Months Ended Mar. 31, 2013 (unaudited)	3 Months Ended Mar. 31, 2014 (unaudited)	3 Months Ended Mar. 31, 2013 (unaudited)
Domain Services
Wholesale
OpenSRS Domain Service	21,649	21,896	18,235	18,454
Value-Added Services	2,604	2,689	541	562
Total Wholesale	24,253	24,585	18,776	19,016
Retail	2,384	1,918	1,015	751
Portfolio	1,053	1,134	244	201
Total Domain Services	27,690	27,637	20,035	19,968
Network Access Services (Ting)	6,712	2,348	4,281	2,110

Network, other costs	-	-	1,144	1,254
Network, depreciation and amortization costs	-	-	183	173
Total revenue/cost of revenue	34,402	29,985	25,643	23,505

NOTE: To better reflect the manner in which these revenue streams are generated and assessed by management, beginning in the first quarter of 2014, Tucows has reclassified its revenue streams into Domain Services and Network Access Services. Domain Services includes Wholesale OpenSRS (Domain Service and Value Added Services), Retail (Hover) and Portfolio. Network Access Services includes Ting.

"Our performance in the first quarter once again demonstrates the reliability and consistency of the business, alongside our ability to generate growth," said Elliot Noss, President and Chief Executive Officer, Tucows Inc. "Ting delivered another record quarter, adding more than 13,000 accounts and 20,000 devices to end the quarter at 61,000 accounts and 94,000 devices, and subsequent to quarter end, we achieved another growth milestone, surpassing 100,000 devices. After little more than two years since launch, Ting is on track to match and exceed the size of our Wholesale domains business in terms of gross margin contribution later this year."

"Our Domain Services business continues to perform well," added Mr. Noss. "Our Wholesale channel and our Portfolio services business both had solid quarters, while our Retail channel, Hover, delivered yet another quarter of year-over-year growth in excess of 20%."

Net revenue for the first quarter of 2014 increased 15% to $34.4 million from $30.0 million for the first quarter of 2013.

Net income for the first quarter of 2014 was $0.5 million, or $0.04 per share, compared with $0.08 million, or $0.01 per share, for the first quarter of 2013. Net income for the first quarter of 2014 included a loss on foreign exchange contracts of $0.6 million compared with a loss on foreign exchange contracts of $0.2 million in the first quarter of 2013. Net income for the first quarter of 2014 also included the incremental investment of approximately $1.2 million for the acquisition and support of Ting customers as compared to the first quarter of 2013.

Deferred revenue at the end of the first quarter of 2014 was $72.8 million, a marginal increase from $72.4 million at the end of the first quarter of 2013 and an increase of 4% from $70.0 million at the end of the fourth quarter of 2013.

Cash and cash equivalents at the end of the first quarter of 2014 were $13.5 million compared with $12.4 million at the end of the fourth quarter of 2013 and $4.3 million at the end of the first quarter of 2013. The increase in cash and cash equivalents of $1.1 million when compared to the fourth quarter of 2013 primarily resulted from the $1.0 million in incremental tax benefit related to share-based compensation and the $0.9 million in proceeds we received from the issuance of our common stock through the exercise of stock options during the first quarter of 2014. This was partially offset by the use of $0.6 million for principal repayments under the Company's credit facility and investment of $0.1 million in equipment purchases.

Conference Call
Tucows management will host a conference call today, Wednesday, May 14, 2014 at 5:00 p.m. (ET) to discuss the Company's first quarter 2014 results. Participants can access the conference call by dialing 1-888-231-8191 or 647-427-7450 or via the Internet at www.tucowsinc.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 pass code 30814878 followed by the pound key. The telephone replay will be available until Wednesday, May 21, 2014 at midnight. To access the archived conference call as an MP3 via the Internet, go to http://tucowsinc.com/investors.

About Tucows
Tucows is a global Internet services company. OpenSRS (http://opensrs.com) manages over fourteen million domain names and millions of value-added services through a reseller network of over 13,000 web hosts and ISPs. Hover (http://hover.com) is the easiest way for individuals and small businesses to manage their domain names and email addresses. Ting (https://ting.com) is a mobile phone service provider dedicated to bringing clarity and control to US mobile phone users. YummyNames (http://yummynames.com) owns and operates premium domain names that generate revenue through advertising or resale. More information can be found on Tucows' corporate website (http://tucows.com).

Tucows Inc.
Consolidated Balance Sheets
(Dollar amounts in U.S. dollars)

			March 31,		December 31,
			2014		2013
			(unaudited)

Assets

Current assets:
	Cash and cash equivalents		$	13,537,252	$	12,418,888
	Accounts receivable		6,568,324		5,305,403
	Inventory		509,433		309,686
	Prepaid expenses and deposits		4,675,875		4,309,039
	Prepaid domain name registry and ancillary services fees, current portion		45,831,314		44,209,591
	Deferred tax asset, current portion		1,648,178		1,081,526
	Income taxes recoverable		1,210,117		475,889
		Total current assets	73,980,493		68,110,022

Prepaid domain name registry and ancillary services fees, long-term portion			12,032,539		11,838,579
Property and equipment			1,873,124		1,757,836
Deferred tax asset, long-term portion			5,242,356		5,370,037
Intangible assets			14,931,888		15,403,228
Goodwill			18,873,127		18,873,127
		Total assets	$	126,933,527	$	121,352,829


Liabilities and Stockholders' Equity

Current liabilities:
	Accounts payable		$	4,317,717	$	2,361,481
	Accrued liabilities		3,490,636		3,913,034
	Customer deposits		4,471,817		4,500,946
	Derivative instrument liability		905,951		491,098
	Loan payable, current portion		5,683,333		6,300,000
	Deferred revenue, current portion		56,789,545		54,379,719
	Accreditation fees payable, current portion		525,977		473,811
	Income taxes payable		311,131		1,024,004
		Total current liabilities	76,496,107		73,444,093

Deferred revenue, long-term portion			15,977,624		15,638,517
Accreditation fees payable, long-term portion			133,443		135,522
Deferred rent, long-term portion			79,191		75,979
Deferred tax liability, long-term portion			5,125,000		5,141,500

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; 11,192,884 shares issued and outstanding as of March 31, 2014 and 10,907,063 shares issued and outstanding as of December 31, 2013 (1)		13,301,296		11,859,267
	Additional paid-in capital		29,133,854		28,632,311
	Deficit		(12,852,540)		(13,329,379)
	Accumulated other comprehensive income (loss)		(460,448)		(244,981)
		Total stockholders' equity	29,122,162		26,917,218
Total liabilities and stockholders' equity			$	126,933,527	$	121,352,829

(1) Shares issued and outstanding at both March 31, 2014 and December 31, 2013 reflects the 1-for-4 reverse split of common shares that became effective on December 31, 2013.

			Tucows Inc.
			Consolidated Statements of Operations
			(Dollar amounts in U.S. dollars)

			Three months ended March 31,
				2014		2013
				(unaudited)

Net revenues			$	34,402,394	$	29,985,022

Cost of revenues:
	Cost of revenues			24,316,639		22,077,899
	Network expenses (*)			1,143,644		1,254,213
	Depreciation of property and equipment			182,974		137,072
	Amortization of intangible assets			-		35,910
		Total cost of revenues		25,643,257		23,505,094

Gross profit				8,759,137		6,479,928

Expenses:
	Sales and marketing (*)			4,021,774		2,847,086
	Technical operations and development (*)			1,089,898		1,133,830
	General and administrative (*) (note 1)			1,767,800		1,698,632
	Depreciation of property and equipment			56,304		50,939
	Amortization of intangible assets			219,030		219,030
	Impairment of indefinite life intangible assets			250,688		-
	Loss on currency forward contracts			551,371		234,638
		Total expenses		7,956,865		6,184,155

Income from operations				802,272		295,773

Other income (expenses):
	Interest expense, net			(73,833)		(99,362)
		Total other income (expenses)		(73,833)		(99,362)

Income before provision for income taxes				728,439		196,411

Provision for income taxes				251,600		119,832
Net income				476,839		76,579

Other comprehensive income (loss), net of tax
	Unrealized loss on hedging activities			(363,181)		(185,785)
	Net amount reclassified to earnings			147,714		-
Other comprehensive loss, net of tax of $112,240 (2013 : $96,777)				(215,467)		(185,785)

Comprehensive income (loss), net of tax for the period			$	261,372	$	(109,206)

Basic earnings per common share			$	0.04	$	0.01

Shares used in computing basic earnings per common share				11,028,559		10,082,860

Diluted earnings per common share			$	0.04	$	0.01

Shares used in computing diluted earnings per common share				11,639,617		11,077,831



(*) Stock-based compensation has been included in expenses as follows:
	Network expenses		$	8,881	$	6,126
	Sales and marketing		$	35,999	$	26,410
	Technical operations and development		$	18,205	$	15,247
	General and administrative		$	37,892	$	27,059

(1) Shares used in computing earnings per share as well as earnings per common share reflects the 1-for-4 reverse split of common shares that became effective on December 31, 2013.

			Tucows Inc.
			Consolidated Statements of Cash Flows
			(Dollar amounts in U.S. dollars)

			Three months ended March 31,
				2014		2013
Cash provided by:				(unaudited)
Operating activities:

	Net income for the period		$	476,839	$	76,579
	Items not involving cash:
		Depreciation of property and equipment		239,278		188,011
		Amortization of deferred financing charges		219,030		254,940
		Impairment of indefinite life intangible asset		250,688		-
		Deferred income taxes (recovery)		(343,231)		(92,065)
		Excess tax benefits from share-based compensation expense		(1,013,800)		-
		Amortization of intangible assets		3,212		5,504
		Disposal of domain names		1,622		14,493
		Loss on change in the fair value of forward contracts		87,146		451,141
		Stock-based compensation		100,977		74,842
	Changes in non-cash operating working capital:
		Accounts receivable		(1,262,921)		(548,318)
		Inventory		(199,747)		278,300
		Prepaid expenses and deposits		(366,836)		(338,298)
		Prepaid fees for domain name registry and ancillary services fees		(1,815,683)		(1,041,714)
		Income taxes recoverable/payable		(433,301)		109,153
		Accounts payable		1,670,415		605,924
		Accrued liabilities		(422,398)		(524,202)
		Customer deposits		(29,129)		(561,421)
		Deferred revenue		2,748,933		1,419,584
		Accreditation fees payable		50,087		43,999
	Net cash (used in) provided by operating activities			(38,819)		416,452

Financing activities:
	Proceeds received on exercise of stock options			911,081		38,509
	Excess tax benefits on share-based compensation expense			1,013,800		-
	Repurchase of common stock			(82,286)		(6,537,616)
	Proceeds received on loan payable			-		5,200,000
	Repayment of loan payable			(616,667)		(800,000)
	Net cash provided by (used in) financing activities			1,225,928		(2,099,107)

Investing activities:
	Additions to property and equipment			(68,745)		(446,705)
	Net cash used in investing activities			(68,745)		(446,705)

Increase (decrease) in cash and cash equivalents				1,118,364		(2,129,360)

Cash and cash equivalents, beginning of period				12,418,888		6,415,679
Cash and cash equivalents, end of period			$	13,537,252	$	4,286,319

Supplemental cash flow information:
	Interest paid		$	73,949	$	99,504
Income taxes paid, net			$	669,624	$	11,150

Supplementary disclosure of non-cash investing activity:
	Property and equipment acquired during the period not yet paid for		$	285,821	$	161,223

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.

SOURCE Tucows Inc.