Tucows Reports Continued Strong Results for the First Quarter of Fiscal 2007

Quarter Highlighted by Solid Financial Performance, Including Record Revenue, Record Adjusted Net Income and Continued Strong Cash Flow Generation

TORONTO, May 10 /CNW/ – Tucows Inc. (AMEX:TCX, TSX:TC), a leading provider of Internet services to web hosting companies, ISPs and other service providers worldwide, today reported its financial results for the first
quarter of fiscal 2007, ended March 31, 2007.

Highlights for the first quarter included:

  • A 16% year-over-year increase in net revenue to a record $17.8 million
  • A 62% year-over-year increase in adjusted net income to a record $2.4 million
  • Net income of $0.7 million
  • Cash flow from operating activities of $1.2 million
  • A 17% year-over-year increase in deferred revenue to a record $48.0 million.
  • “The first quarter of 2007 was highlighted by another solid financial performance,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “We continue to grow our business by using our wholesale channel to deliver Internet services like domain names and email that are critical to our service provider customers. As our business scales, the leverage in our business becomes more and more apparent. We expect to see continued growth as we move forward.”

    “The first quarter puts us on track to meet our announced target of $10-12 million in cash flow from operations for 2007,” said Noss. “We continue to expect domain registration revenue to grow in the low double digits and remaining revenue to grow at higher rates. We expect that operating expenses will only increase at about half the rate of gross profit.”

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

    Three Months Ended
    March 31, 2007
    Three Months Ended
    March 31, 2006
    Net Revenue 17,771 15,287
    EBITDA 1,971 434
    Adjusted Net Income 2,442 1,506
    Net Income 750 (157)
    Net Income/Share 0.01 0.00
    Cash Flow from Operations 1,165 1,834

    Cash, short-term investments and restricted cash at the end of the first quarter of fiscal 2007 was $6.6 million compared to $7.3 million at the end of the fourth quarter of fiscal 2006 and $11.8 million at the end of the first quarter of fiscal 2006. The decrease compared to the end of the fourth quarter of fiscal 2006 is primarily the result of the use of $1.3 million for the repurchase of the Company’s shares under its previously announced stock buyback program and the use of $1.2 million to purchase hardware to support the hosted email services business, which were partially offset by the generation of cash flow from operations of $1.2 million during the first quarter of fiscal 2007.

    Net revenue for the first quarter of fiscal 2007 increased 16% to $17.8 million from $15.3 million for the first quarter of fiscal 2006. The increase was the result of growth across all areas of the business.

    Revenue Cost of Revenue (excluding Network costs)
    Three Months Ended
    March 31, 2007
    Three Months Ended
    March 31, 2006
    Three Months Ended March 31, 2007 Three Months Ended March 31, 2006
    Domain Names, Excluding Domain Direct 11,901 10,667 8,782 7,675
    Other Internet Services, Including Domain Direct 4,400 3,776 1,015 932
    Sale of Domain Names 82 - - -
    Advertising and Other Revenue 1,388 844 52 -
    Total 17,771 15,287 9,849 8,607

    Adjusted net income for the first quarter of fiscal 2007 increased to $2.4 million from $1.5 million for the corresponding quarter of last year. Net income for the first quarter of fiscal 2007 was $0.7 million, or $0.01 per share, compared with a net loss of $0.2 million, or $0.00 per share, for the first quarter of fiscal 2006. Included in net income and adjusted net income for the first quarter of fiscal 2007 is a gain on foreign exchange of $51,000 compared with a loss on foreign exchange of $88,000 for the corresponding quarter of fiscal 2006.

    Deferred revenue at the end the first quarter of fiscal 2007 was $48.0 million, an increase of 17% from $41.1 million at the end of the first quarter of fiscal 2006 and an increase of 6% from $45.1 million at the end of the fourth quarter of fiscal 2006.

    This release may contain forward-looking statements, relating to the Company’s operations or to the environment in which it operates, which are based on Tucows Inc.’s operations, estimates, forecasts and projections. These statements are not guarantees of future performance and are subject to important risks, uncertainties and assumptions concerning future conditions that may ultimately prove to be inaccurate or differ materially from actual future events or results. A number of important factors could cause actual outcomes and results to differ materially from those expressed in these forward-looking statements. Consequently, investors should not place undue reliance on these forward-looking statements, which are based on Tucows Inc.’s current expectations, estimates, projections, beliefs and assumptions. These forward-looking statements speak only as of the date of this presentation and are based upon the information available to Tucows Inc. at this time. Tucows Inc. disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

    Conference Call

    Tucows will host a conference call today, Thursday, May 10, 2007, at 5:00 p.m. (ET) to discuss the Company’s first quarter fiscal 2007 results. To access the conference call via the Internet go to http://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 1-877-289-8525 or 416-640-1917 and enter the pass code 21228036 followed by the pound key. The telephone replay will be available until Thursday, May 17, 2007, at midnight. To access the archived conference call via the Internet, go to http://tucowsinc.com and click on “Investor Relations.‚Äù

    About Tucows

    Tucows Inc. (AMEX:TCX, TSX:TC) provides Internet services and download libraries through a global distribution network of over 7,000 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:
    Leona Hobbs
    Director, Communications
    Tucows Inc.
    416-538-5450
    ir@tucows.com

    TUCOWS is a registered trademark of Tucows Inc. or its subsidiaries. All other trademarks and service marks are the properties of their respective owners.

    Consolidated Balance Sheets
    Consolidated Statements of Operations
    Reconciliation of EBITDA and Adjusted EBITDA

    Consolidated Statements of Cash Flows


    Tucows Inc.

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


    March 31 ,
    2007


    December 31,
    2006

    Assets
    Current assets:
    Cash and cash equivalents $ $5,819,984 $ $6,256,392
    Restricted cash 767,785 1,019,423
    Accounts receivable 3,822,620 2,969,997
    Prepaid expenses and deposits 3,121,863 2,394,627
    Prepaid domain name registry and other Internet services fees, current portion 23,708,449 22,168,558
    Deferred tax asset, current portion 1,000,000
    1,000,000
    Total current assets 38,240,701 35,808,997
    Prepaid domain name registry and other Internet services fees, long-term portion 9,952,103 9,511,341
    Property and equipment 6,740,768 5,647,532
    Deferred tax asset, long-term portion 2,000,000 2,000,000
    Intangible assets 18,286,331 18,554,436
    Goodwill 12,184,867 12,094,817
    Investment 353,737 353,737
    Cash held in escrow -
    694,579
    Total assets $ 87,758,507
    $ 84,665,439

    Liabilities and Stockholders’ Equity
    Current liabilities:
    Accounts payable $ 3,221,473 $ 2,867,814
    Accrued liabilities 2,999,362 2,567,012
    Customer deposits 2,968,995 3,144,119
    Deferred revenue, current portion 33,787,876 31,658,081
    Accreditation fees payable, current portion 841,928
    847,325
    Total current liabilities 43,819,634 41,084,351
    Deferred revenue, long-term portion 14,245,655 13,478,525
    Accreditation fees payable, long-term portion 168,677 163,988
    Promissory note payable 6,000,000 6,000,000
    Deferred tax liability 5,396,000 5,396,000
    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; 74,713,234 shares issued and outstanding at March 31, 2007 and 75,978,502 shares issued and outstanding at December 31, 2006 15,282,470 15,395,381
    Additional paid-in capital 49,309,088 50,359,906
    Deficit (46,463,017)
    (47,212,712)

    Total stockholders’ equity 18,128,541
    18,542,575
    Total liabilities and stockholders’ equity $ 87,758,507

    $ 84,665,439


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

    Three months ended
    March 31,
    2007
    2006

    Net revenues $ 17,771,217 $ 15,287,120
    Cost of revenues:
    Cost of revenues (*) 11,232,789 9,927,854
    Depreciation of property and equipment 809,666 524,919
    Amortization of intangible assets 63,532

    38,540
    Total cost of revenues 12,105,987
    10,491,313
    Gross profit 5,665,230 4,795,807
    Operating expenses:
    Sales and marketing (*) 1,344,444 1,459,156
    Technical operations and development (*) 1,812,279 2,320,716
    General and administrative (*) 1,498,769 1,619,053
    Depreciation of property and equipment 61,524 37,050
    Amortization of intangible assets 233,301

    93,293

    Total operating expenses 4,950,317

    5,529,268
    Income (loss) from operations 714,913 (733,461)
    Other income (expenses):
    Interest income (expenses), net (41,649) 102,891
    Other income 88,431
    473,606
    Total other income 46,782
    576,497

    Income before provision for income taxes 761,695 (156,964)
    Provision for income taxes 12,000 -

    Net income (loss) for the period $ 749,695

    $ (156,964)
    Basic earnings per share $ 0.01
    $ (0.00)
    Shares used in computing basic earnings per common share 75,459,822

    71,980,393
    Diluted earnings per share $ 0.01

    $ (0.00)
    Shares used in computing diluted earnings per common share 77,959,165

    71,980,393

    (*) Stock-based compensation has been included in operating expenses as follows:
    Cost of revenues $ 2,500 $ 2,400
    Sales and marketing $ 14,200 $ 17,400
    Technical operations and development $ 20,100 $ 23,700
    General and administrative $ 25,900 $ 26,700

    Tucows Inc.
    Reconciliation of EBITDA and Adjusted EBITDA
    (Dollar amounts in U.S. dollars)
    (unaudited)

    Three months ended
    March 31,
    2007
    2006

    Net income (loss) for the period $ 749,695 $ (156,964)
    Depreciation of property and equipment 871,190 561,969
    Amortization of intangible assets 296,833 131,833
    Interest income(expense), net 41,649 (102,891)
    Provision for income taxes 12,000
    -

    EBITDA 1,971,367
    433,947
    Adjustments to EBITDA (1)
    Change in prepaid fees for domain name registry and other Internet services fees (1,980,653) (2,313,048)
    Change in deferred revenue 2,896,925 3,044,520
    Dividend income (88,431) -
    Transitional costs - 814,263
    Other income - (473,606)
    Reversal of contingencies (357,500)

    -

    Subtotal Adjustments to EBITDA 470,341
    1,072,129
    Adjusted Net Income $ 2,441,708
    $ 1,506,076
    (1) Adjustments to EBITDA
    We define Adjusted EBITDA as net income adjusted for depreciation, amortization, interest, taxes and further adjusted for certain cash and non-cash charges. For the three months ended March 31, 2006, we incurred $814,263 of transitional costs in connection with our acquisition of the Hosted Messaging assets of Critical Path. In addition, during the three months ended March 31, 2006, we received $473,606 in connection with settlements related to patents we acquired in the merger with Infonautics in 2001. The net amount of cash we collected for domain registrations and other Internet services paid for the full term at the time of activation and deferred, amounted to $916,272 for the three months ended March 31, 2007 compared to $2,896,925 for the three months ended March 31, 2006.

    Tucows Inc.
    Consolidated Statements of Cash Flows

    (Dollar amounts in U.S. dollars)
    (unaudited)

    Three months ended
    March 31,
    2007
    2006
    Cash provided by (used in):
    Operating activities:
    Net income(loss) for the period $ 749,695 $ (156,964)
    Items not involving cash:
    Depreciation of property and equipment 871,190 561,969
    Amortization of intangible assets 296,833 131,833
    Unrealized change in the fair value of forward exchange contracts (216,789) 182,944
    Stock-based compensation 62,700 70,200
    Change in non-cash operating working capital:
    Interest receivable - 37,594
    Accounts receivable (852,623) (1,827,642)

    Prepaid expenses and deposits (727,236) 3,413
    Prepaid fees for domain name registry and other Internet services fees (1,980,653) (2,313,048)
    Accounts payable (408,137) 492,667
    Accrued liabilities 649,139 1,327,080
    Customer deposits (175,124) 147,834
    Deferred revenue 2,896,925 3,044,520
    Accreditation fees payable (708)
    131,264
    Cash (used in) provided by operating activities 1,165,212
    1,833,664

    Financing activities:
    Proceeds received on exercise of stock options 101,071 28,009
    Purchase of Shares (1,327,500)
    -
    Cash (used in) provided by financing activities (1,226,429)

    28,009 s

    Investing activities:
    Cost of domains acquired (28,728) -
    Additions to property and equipment (1,202,630) (886,279)
    Decrease in investment in short-term investments - 1,699,569
    Decrease (increase) in restricted cash – being margin security against forward exchange contracts 251,638 (552,500)
    Acquisition of Hosted Messaging Assets, net of cash acquired (90,050) (6,583,454)
    (Increase) decrease in cash held in escrow 694,579
    (1,766,504)

    Cash used in investing activities (375,191)
    (8,089,168)
    Decrease in cash and cash equivalents (436,408) (6,227,495)
    Cash and cash equivalents, beginning of period 6,256,392
    17,348,088
    Cash and cash equivalents, end of period $ 5,819,984
    $ 11,120,593

    Supplemental cash flow information:
    Interest paid $ 105,000 $ -
    Non-cash investing activity
    Capital assets acquired during the period not yet paid for 1,146,066 -
    Dividend receivable 88,431 -
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