Tucows Announces Fourth Quarter Fiscal 2005 Results

Company achieves record revenue/Establishes itself as leader in hosted email market

TORONTO, CANADA, February 9, 2005 – Tucows Inc. (AMEX:TCX, TSX:TC) today reported financial results for its fourth quarter and the fiscal year ended December 31, 2005.

Highlights for the fourth quarter included:

  • A 10% year-over-year increase in net revenue to a record $12.7 million;
  • Income from operations of $0.6 million;
  • Net income of $1.0 million, the Company’s fourteenth consecutive quarter of profitability;
  • Cash flow from operations of $1.2 million, the Company’s seventeenth consecutive quarter of positive cash flow from operations;
  • A 14% year-over-year increase in deferred revenue to a record $37.9 million; and
  • Signing of a definitive agreement with Critical Path, Inc. to acquire substantially all of Critical Path’s hosted messaging assets. With this acquisition, Tucows becomes a leader in hosted email, further diversifies its revenue stream, adds customers and grows its infrastructure capabilities

Highlights for the fiscal year included:

  • A 8% year-over-year increase in net revenue to $48.5 million;
  • Income from operations of $1.9 million;
  • Net income of $2.8 million;
  • Cash flow from operations of $4.1 million.
  • “The fourth quarter caps off a year of significant achievement for Tucows” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “We strengthened our shareholder base and improved our public market listing with our successful secondary offering. We diversified our revenue base and significantly expanded our presence in email with our acquisition of Critical Path’s hosted email business. We strengthened and realigned our people to better reflect our new multi-service environment. We also posted a year of strong financial results with continued growth and profitability in the face of increased ICANN fees and a strengthening Canadian dollar.”

    We believe that these accomplishments will serve Tucows well for 2006 and beyond and will allow us to focus on our priorities for 2006. These priorities include integrating the Critical Path hosted email business, improving the user experience for Internet services like Blogware and email, increasing efficiency in the market for domain names by leveraging the secondary market and reaching a much broader segment of our channel with our billing and customer care solutions.”

    Summary Financial Results
    Tucows Inc.
    (Numbers in Thousands, Except Per Share Data)

    >
    3 Months Ended Dec. 31, 2005 3 Months Ended Dec. 31, 2004 9 Months Ended Dec. 31, 2005 9 Months Ended Dec. 31, 2004*
    Net Revenue 12,658 11,522 48,517 44,717
    Income from Operations 566 801 1,855 2,149
    Net Income 1,034 3,865** 2,773 5,500**
    Net Income/Share 0.01 0.06** 0.04 0.08**
    Cash Flow from Operations 1,141 1,578 4,064 4,668


    *Includes the recognition of deferred domain name revenue of approximately $1.1 million that was recognized as a result of one of our resellers becoming an accredited registrar and transferring all of its domain names from our tag to its own tag with the result that Tucows was no longer accountable for those transactions. Included in cost of revenue is $0.8 million previously deferred against these names in prepaid domain name registry fees.

    **Includes a non-cash income tax benefit of $3.0 million or $0.04 per share, resulting from the reduction in our deferred tax asset valuation allowance.

    Net revenue for the fourth quarter of fiscal 2005 increased 10% to $12.7 million from $11.5 million for the fourth quarter of fiscal 2004. The increase was the result of a higher number of domain transactions, as well as higher revenue from ancillary services, which were partially offset by lower revenue from our content business due to the short-term impact of the relaunch of our web site earlier in the year.

    Income from operations for the fourth quarter of fiscal 2005 was $0.6 million compared with $0.8 million for the corresponding quarter of last year. Income from operations for the fourth quarter of fiscal 2005 included a loss on foreign exchange of $21,000 compared with a gain of $204,000 for the fourth quarter of fiscal 2004. Net income for the fourth quarter of fiscal 2005 was $1.0 million, or $0.01 per share, compared with $3.9 million, or $0.06 per share, for the fourth quarter of fiscal 2004. Net income for the fourth quarter of fiscal 2004 included a non-cash income tax benefit of $3.0 million, or $0.04 per share, resulting from the reduction of the Company’s deferred tax asset valuation allowance.

    Deferred revenue at the end the fourth quarter of fiscal 2005 was $37.9 million, an increase of 14% from $33.3 million at the end of the fourth quarter fiscal 2004 and an increase of 1% from $37.3 million at the end of the third quarter of fiscal 2005.

    Cash, short-term investments and restricted cash at the end of the fourth quarter of fiscal 2005 increased to $19.2 million from $14.4 million at the end of the fourth quarter of fiscal 2004 and $18.4 million at the end of the third quarter of fiscal 2005. The increase compared to the third quarter of fiscal 2005 is the result of positive cash flow from operations for the fourth quarter of $1.1 million.

    Developments During the Quarter

    As previously announced, Tucows signed a definitive agreement with Critical Path, Inc. to acquire substantially all of Critical Path’s hosted messaging assets, including the customer base, hosted messaging communications infrastructure, and other related assets. With the acquisition, Tucows becomes a leader in hosted email solutions, especially for Internet service providers and web hosting companies. The acquisition will further diversify Tucows’s revenue stream, while providing the opportunity to strengthen relationships with existing customers and add new service provider customers.

    Conference Call

    Tucows will host a conference call today, Thursday, February 9, 2005, at 5:00 p.m. (ET) to discuss the company’s fourth quarter fiscal 2005 results. To access the conference call via the Internet go to www.tucowsinc.com, and click on “Investor Relations.”

    For those unable to join 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 1-800-408-3053 or 416-695-5800 and enter the pass code 3175749 followed by the pound key. The telephone replay will be available until Thursday, February 16, 2005, at midnight. To access the archived conference call via the Internet, go to www.tucowsinc.com and click on “Investor Relations.”

    About Tucows

    Tucows Inc. (AMEX:TCX, TSX:TC) provides Internet services and download libraries through a global distribution network of 6,000 service providers. This distribution network primarily consists of web hosting companies, ISPs (Internet Service Providers) and other Internet related service companies. These companies use Tucows’ provisioned services to offer solutions to their customers: enterprises, small and medium businesses and consumers. Tucows is an accredited registrar with ICANN (the Internet Corporation for Assigned Names and Numbers) and earns most of its revenue from domain name registration services plus hosted email, spam and virus protection, Blogware, website building tools, the Platypus Billing System and digital certificates. For more information, please visit: www.tucowsinc.com

    Contact:
    Hilda Kelly
    Investor Relations

    Tucows Inc.
    416-538-5493
    Consolidated Balance Sheets
    Consolidated Statements of Operations
    Consolidated Statements of Cash Flows


    Tucows Inc.

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

    December 31,
    2005
    December 31,
    2004
    Assets
    Current assets:
    Cash and cash equivalents $ 17,348,088 $ 13,914,988
    Short-term investments 1,771,569 -
    Restricted cash (note 1) 60,000 460,398
    Interest receivable 39,574 -
    Accounts receivable 1,439,329 1,111,082
    Prepaid expenses and deposits 1,999,820 2,156,702
    Prepaid domain name registry and ancillary services fees, current portion 18,175,988 15,601,786
    Deferred tax asset, current portion 1,000,000
    1,000,000
    Total current assets 41,834,368 34,244,956
    Prepaid domain name registry and ancillary services fees, long-term portion 7,701,939 6,471,916
    Deferred acquisition costs 46,034 -
    Property and equipment 1,542,671 1,017,237
    Deferred tax asset, long-term portion 2,000,000 2,000,000
    Intangible assets 1,006,080 1,242,240
    Goodwill 1,951,067 964,467
    Investments 353,737 353,737
    Cash held in escrow 621,412 1,009,650
    Total assets $
    57,057,308
    $
    47,304,203
    Liabilities and Stockholders’ Equity
    Current liabilities:
    Accounts payable $ 1,655,195 $ 1,483,543
    Accrued liabilities 1,417,035 2,688,738
    Customer deposits 2,276,637 2,247,262
    Deferred revenue, current portion 26,790,166 23,648,381
    Accreditation fees payable, current portion 651,811
    144,483
    Total current liabilities 32,790,844 30,212,407
    Deferred revenue, long-term portion 11,079,537 9,602,599
    Accreditation fees payable, long-term portion 94,785 31,816
    Stockholders’ equity:
    Preferred stock – no par value, 1,250,000,000 shares authorized; none issued and outstanding - -
    Common stock – no par value, 250,000,000 shares authorized; 71,840,267 shares issued and outstanding at December 31, 2005 and 66,817,250 shares issued and outstanding at December 31, 2004 12,403,422 9,541,277
    Additional Paid-in Capital 50,061,866 50,061,866
    Deficit (49,373,146)

    (52,145,762)
    Total stockholders’ equity 13,092,142
    7,457,381
    Total liabilities and stockholders’ equity $ 57,057,308
    $ 47,304,203

    Note 1:
    The restricted cash represents margin security against a series of forward exchange contracts.

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

    Three months ended
    December 31,
    Year ended
    December 31,
    2005
    2004
    2005
    2004

    Net revenues $ 12,658,399 $ 11,521,955 $ 48,517,039 $ 44,717,155
    Cost of revenues 8,160,474
    6,907,776
    30,645,004
    27,566,066
    Gross profit 4,497,925
    4,614,179
    17,872,035
    17,151,089

    Operating expenses:
    Sales and marketing (*) 1,185,865 1,351,649 4,855,050 5,067,841
    Technical operations and development 1,479,959 1,289,486 5,627,426 4,549,368
    General and administrative(*) 987,877 811,985 4,346,224 4,107,981
    Depreciation of property and equipment 219,527 301,259 951,692 1,118,734
    Amortization of intangible assets 59,040 59,040 236,160 157,760
    Total operating expenses
    3,932,268

    3,813,419

    16,016,552

    15,001,684
    Income from operations 565,657 800,760 1,855,483 2,149,405
    Other Income:
    Interest income, net 165,565 64,216 462,424 200,501
    Other income 302,734 - 302,734 -
    Total other income
    468,299

    64,216

    765,158

    200,501
    Income before provision for income taxes 1,033,956 864,976 2,620,641 2,349,906
    Provision for (recovery of) income taxes -
    (3,000,000)
    (151,975)
    (3,150,432)

    Net income for the year $ 1,033,956
    $ 3,864,976

    $ 2,772,616
    $ 5,500,338
    Basic and diluted income per share $ 0.01
    $ 0.06
    $ 0.04
    $ 0.08
    Shares used in computing basic earnings per common share 71,898,247
    66,817,250

    69,077,329
    66,079,104
    Shares used in computing diluted income per common share 74,810,799
    68,893,918
    72,481,204
    68,051,579

    (*) Stock-based compensation has been included in operating expenses as follows:
    Sales and marketing $ - $ - $ - $ 16,835
    Technical operations and development $ - $ 69,737 $ - $ 69,737
    General and administrative $ - $ - $ - $ 3,759


    Tucows Inc.
    Consolidated Statements of Cash Flows
    (Dollar amounts in U.S. dollars)
    Three months ended
    December 31,
    Year ended
    December 31,
    2005
    2004
    2005
    2004
    Cash provided by (used in):
    Operating activities:
    Net income for the year $ 1,033,956 $ 3,864,976 $ 2,772,616 $ 5,500,338
    Items not involving cash:
    Depreciation of property and equipment 219,527 301,259 951,692 1,118,734
    Amortization of intangible assets 59,040 59,040 236,160 157,760
    Unrealized change in the fair value of forward contracts 212,668 100,032 30,119 (88,743)
    Stock-based compensation - 69,737 - 69,737
    Amortization of stock-based compensation - - - 20,593
    Deferred taxes - (3,000,000) - (3,000,000)
    Change in non-cash operating working capital:
    Interest receivable 76,165 - (39,574) -
    Accounts receivable (76,442) (89,847) (328,247) (546,762)
    Prepaid expenses and deposits (524,722) (180,526) 126,763 (1,333)
    Prepaid domain name registry fees (430,973) (806,264) (3,804,225) (3,732,942)
    Accounts payable (60,214) 139,182 171,652 (148,751)
    Accrued liabilities (326,808) (42,295) (1,271,703) 403,404
    Customer deposits 106,747 241,361 29,375 77,772
    Deferred revenue 550,242 745,203 4,618,723 4,661,788
    Accreditation fees payable 302,241
    176,299

    570,297
    176,299
    Cash provided by operating activities 1,141,427
    1,578,157
    4,063,648
    4,667,894
    Financing activities:
    Proceeds received on exercise of stock options 49,254 - 300,870 726,050
    Net proceeds received on isuance of common stock, net of issue costs -
    -
    1,574,675
    -
    Cash provided by financing activities 49,254
    -
    1,875,545
    726,050
    Investing activities:
    Additions to property and equipment (349,445) (538,220) (1,477,126) (1,034,709)
    Investment in short-term investments 5,999,884 - (1,771,569) -
    Decrease (increase) in restricted cash – being margin security against forward exchange contracts 240,000 (247,898) 400,398 (327,898)
    Deferred acquisition costs (46,034) - (46,034) -
    Acquisition of Boardtown Corporation, net of cash acquired - - - (2,019,510)
    Increase in cash held in escrow (2,330)
    (9,650)
    388,238
    (1,009,650)
    Cash provided by (used in) investing activities 5,842,075
    (795,768)
    (2,506,093)
    (4,391,767)
    Increase in cash and cash equivalents 7,032,756 782,389 3,433,100 1,002,177
    Cash and cash equivalents, beginning of year 10,315,332
    13,132,599
    13,914,988
    12,912,811
    Cash and cash equivalents, end of year $ 17,348,088
    $ 13,914,988
    $ 17,348,088
    $ 13,914,988
    Supplemental cash flow information:
    Interest paid $ - $ - $ 300 $ 166
    Supplemental disclosure of non-cash investing and financing activities:
    Common stock issued on the acquisition of Boardtown Corporation $ - $ - $ 986,600 $ 274,540
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