Tucows Reports Continued Strong Results for the Fourth Quarter and Year End Fiscal 2006

Company Achieves Sixteenth Consecutive Quarter of Year-Over-Year Revenue Growth and Exceeds Annual Cash Flow From Operations Target
TORONTO – February 8, 2007 – 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 fourth quarter and fiscal year ended December 31, 2006.

Highlights for the fourth quarter included:

  • A 36% year-over-year increase in net revenue to a record $17.2 million;
  • Net income of $0.2 million;
  • Cash flow from operating activities of $3.9 million; and,
  • A 19% year-over-year increase in deferred revenue to a record $45.1 million.

Highlights for the fiscal year included:

  • A 34% year-over-year increase in net revenue to a record $65.0 million;
  • Net income of $2.2 million;
  • Cash flow from operating activities of $8.8 million; and,
  • A 31% increase in adjusted Net Income to $6.3 million.

“2006 was another year of solid growth, cash generation and execution for Tucows,” said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “More importantly, in 2006 Tucows established itself as an important participant in the hosted email market through the successful execution and integration of three acquisitions and the continued growth of its existing email business. For the Internet in general, the second half of 2006 was marked by a massive increase in problems associated with email including spam, phishing and general email delivery. At the same time, email is now the world’s most important communications tool. All of this, along with the fundamental strength of the Company‚Äôs domain name service offering, combines for great opportunity in 2007.”

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

Three Months Ended
December 31, 2006

Three Months Ended
December 31, 2005

12 Months Ended December 31, 2006

12 Months Ended December 31, 2005

Net Revenue

17,199

12,658

65,029

48,517

EBITDA

1,385

1,478

6,034

4,271

Adjusted Net Income

1,213

1,295

6,267

4,783

Net Income

156

1,034

2,160

2,773

Net Income/Share

0.00

0.01

0.03

0.04

Cash Flow from Operations

3,898

1,141

8,818

4,064

Cash, short-term investments and restricted cash at the end of the fourth quarter of fiscal 2006 was $7.3 million compared to $3.8 million at the end of the third quarter of fiscal 2006 and $19.2 million at the end of the fourth quarter of fiscal 2005. The increase compared to the end of the third quarter of fiscal 2006 is primarily the result of the generation of cash flow from operations of $3.9 million during the fourth quarter of fiscal 2006.

Net revenue for the fourth quarter of fiscal 2006 increased 36% to $17.2 million from $12.7 million for the fourth quarter of fiscal 2005. The increase was the result of growth across all of the Company’s revenue streams.

Adjusted Net Income for the fourth quarter of fiscal 2006 decreased by $0.1 million to $1.2 million from $1.3 million for the corresponding quarter of last year. Net income for the fourth quarter of fiscal 2006 was $0.2 million, or $0.00 per share, compared with $1.0 million, or $0.01 per share, for the fourth quarter of fiscal 2005. Included in Net income and Adjusted Net Income for the fourth quarter of fiscal 2006 is a foreign exchange loss of $0.5 million ($21,000 in fiscal 2005). In the fourth quarter of 2005, other income included $0.3 million ($0 in fiscal 2006) related to the sale of patents.

Adjusted Net Income for the year ended December 31, 2006 increased by 31% to $6.3 million from $4.8 million for the year ended December 31, 2005. Net income for the year ended December 31, 2006 was $2.2 million, or $0.03 per share, compared to $2.8 million, or $0.04 per share for the year ended December 31, 2005. Included in Net income and Adjusted Net Income for fiscal 2006 are transitional costs of $1.3 million ($0 in fiscal 2005). In fiscal 2006, other income included $2.3 million ($0.03 in fiscal 2005) related to the sale of patents.

Deferred revenue at the end the fourth quarter of fiscal 2006 was $45.1 million, an increase of 19% from $37.9 million at the end of the fourth quarter of fiscal 2005 and an increase of 1% from $44.7 million at the end of the third quarter of fiscal 2006.

EBITDA and Adjusted Net Income

To assist financial statement users in their assessment of the Company’s historical performance and to project its future earnings and cash flows, the Company has included earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA is presented because it is an important supplemental measure of performance frequently used by securities analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate EBITDA differently. EBITDA is not a measurement of financial performance under generally accepted accounting principles (GAAP) and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to Net Income as indicators of operating performance or any other measures of performance derived in accordance with (GAAP). Because 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 measure of discretionary cash available to invest in the growth of the business. See the Consolidated Statements of Cash Flows included in the attached financial statements. As a non-GAAP performance measure, EBITDA, has certain material limitations as follows:

  • It does not include interest expense. Because the Company has borrowed money to finance some of its operations, interest is a necessary part of the Company‚Äôs costs and ability to generate revenue. Therefore, any measure that excludes interest has material limitations;
  • It does not include depreciation and amortization expense. Because the Company must utilize capital assets in order to generate revenues, depreciation and amortization expense is a necessary and ongoing part of the Company‚Äôs costs. Therefore, any measure that excludes depreciation and amortization expense has material limitations; and,
  • It does not include taxes. Because the payment of taxes is a necessary and ongoing part of the Company‚Äôs operations, any measure that excludes taxes has material limitations.
    Management compensates for these limitations by considering the economic effect of the excluded expense items independently as well as in connection with its analysis of net earnings.

Adjusted Net Income represents EBITDA plus the additional adjustments described in the table below. Adjusted Net Income is presented because it better represents ongoing business performance than EBITDA. The adjustments reflect the material amount of cash collected by the Company for domain registrations and other Internet services paid for the full term at the time of activation, with the revenue deferred, net of prepaid fees. In addition, adjusted Net Income reflects earnings and expenses considered as non-representative of ongoing business for the reasons specified below. Adjusted Net Income is one of the primary measures the Company uses for planning and budgeting purposes, incentive compensation and to monitor and evaluate Tucows’ financial and operating results. Adjusted Net Income is not a measurement of financial performance under GAAP and should not be considered as an alternative to cash flow from operating activities or as a measure of liquidity or an alternative to net income as indicators of operating performance or any other measures of performance derived in accordance with generally accepted accounting principles. See the Consolidated Statements of Cash Flows included in the attached financial statements.

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, February 8, 2007, at 5:00 p.m. (ET) to discuss the Company’s fourth quarter and year end fiscal 2006 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 1-877-289-8525 or 416-640-1917 and enter the pass code 21217600 followed by the pound key. The telephone replay will be available until Thursday, February 15, 2007, 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 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.


This page prints out best in landscape format 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)


December 31 ,
2006


December 31,
2005

Assets
Current assets:
Cash and cash equivalents $ 6,256,392 $ 17,348,088
Short-term investments - 1,771,569
Restricted cash 1,019,423 60,000
Interest receivable - 39,574
Accounts receivable 2,969,997 1,439,329
Prepaid expenses and deposits 2,394,627 1,999,820
Prepaid domain name registry and other Internet services fees, current portion 22,168,558 18,175,988
Deferred tax asset, current portion 1,000,000
1,000,000
Total current assets 35,808,997 41,834,368
Prepaid domain name registry and other Internet services fees, long-term portion 9,511,341 7,701,939
Deferred acquisition costs - 46,034
Property and equipment 5,647,532 1,542,671
Deferred tax asset, long-term portion 2,000,000 2,000,000
Intangible assets 18,554,436 1,006,080
Goodwill 12,094,817 1,951,067
Investment 353,737 353,737
Cash held in escrow 694,579
621,412

Total assets $ $84,665,439
$ 57,057,308
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 2,867,814 $ 1,655,195
Accrued liabilities 2,567,012 1,417,035
Customer deposits 3,144,119 2,276,637
Deferred revenue, current portion 31,658,081 26,790,166
Accreditation fees payable, current portion 847,325
651,811
Total current liabilities 41,084,351 32,790,844
Deferred revenue, long-term portion 13,478,525 11,079,537
Accreditation fees payable, long-term portion 163,988 94,785
Promissory note payable 6,000,000 -
Deferred tax liability 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; 75,978,502 shares issued and outstanding at December 31, 2006 and 71,945,303 shares issued and outstanding at December 31, 2005 15,395,381 12,403,422
Additional paid-in capital 50,359,906 50,061,866
Deficit (47,212,712)
(49,373,146)
Total stockholders’ equity 18,542,575
13,092,142
Total liabilities and stockholders’ equity $ 84,665,439
$ 57,057,308


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

  Three months ended
December 31,
Year ended
December 31,
  2006
2005
2006
2005
                 
Net revenues $ 17,199,194 $ 12,658,399 $ 65,029,490 $ 48,517,039
                 
Cost of revenues:                
Cost of revenues (*)   11,076,018   8,160,474   41,534,963   30,645,004
Depreciation of property and equipment   865,937   167,082   2,755,736   751,613
Amortization of intangible assets   63,540

  -
  207,168
  -
Total cost of revenues   12,005,495

  8,327,556
  44,497,867
  31,396,617
                 
Gross profit   5,193,699   4,330,843   20,531,623   17,120,422
                 
Operating expenses:                
Sales and marketing (*)   1,247,510   1,185,865   5,985,907   4,855,050
Technical operations and development (*)   1,816,264   1,479,959   8,152,138   5,627,426
General and administrative (*)   1,624,594   987,877   5,890,123   4,346,224
Depreciation of property and equipment   98,015   52,445   223,131   200,079
Amortization of intangible assets   233,301

  59,040

  669,476

  236,160
Total operating expenses   5,019,684

  3,765,186

  20,920,775
  15,264,939
                 
Income (loss) from operations   174,015   565,657   (389,152)   1,855,483
                 
Other income (expenses):                
Interest income (expenses), net   (24,731)   165,565   110,525   462,424
Other income   -
  302,734
  2,347,026

  302,734
Total other income   (24,731)
  468,299

  2,457,551

  765,158
                 
Income before provision for income taxes   149,284   1,033,956   2,068,399   2,620,641
                 
Recovery of income taxes   (7,140)   -   (92,035)

  (151,975)
     
   
   
   
 Net income for the period  $ 156,424

 $ 1,033,956

 $ 2,160,434
 $ 2,772,616
                 
                 
Basic earnings per share $ 0.00
$ 0.01
$ 0.03

$ 0.04
                 
Shares used in computing basic earnings per common share   75,856,208
  71,898,247
  74,032,830

  69,077,329
                 
Diluted earnings per share $ 0.00

$ 0.01
$ 0.03

$ 0.02

         
Shares used in computing diluted earnings per common share   78,186,255

  74,810,799
  76,489,381
  72,481,204
         
                 
(*) Stock-based compensation has been included in operating expenses as follows:                
 Cost of revenues $ 2,000 $ - $ 9,700 $ -
Sales and marketing $ 14,100 $ - $ 64,900 $ -
Technical operations and development $ 19,400 $ - $ 91,700 $ -
General and administrative $ 52,540 $ - $ 131,740 $ -
                 
                 

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

Three months ended
December 31,
Year ended
December 31,
2006
2005
2006

2005
Net income for the period $ 156,424 $ 1,033,956 $ 2,160,434 $ 2,772,616
Depreciation of property and equipment 963,952 219,527 2,978,867 951,692
Amortization of intangible assets 296,841 59,040 876,644 236,160
Interest income(expense), net (24,731) 165,565 110,525 462,424
Recovery of income taxes (7,140)
-

(92,035)
(151,975)
EBITDA 1,385,346
1,478,088

6,034,435
4,270,917

Adjustments to EBITDA (1)
Change in prepaid fees for domain name registry and other Internet services fees (572,164) (430,973) (5,801,972) (3,804,225)
Change in deferred revenue 400,162 550,242 7,102,935 4,618,723
Transitional costs - - 1,278,842 -
Other income -
(302,734)
(2,347,026)
(302,734)

Subtotal Adjustments to EBITDA (172,002)
(183,465)
232,779
511,764

Adjusted Net Income $ 1,213,344

$ 1,294,623
$ 6,267,214

$ 4,782,681
(1) Adjustments to EBITDA
We define Adjusted Net Income as net income adjusted for depreciation, amortization, interest, taxes and further adjusted for certain cash and non-cash charges. For the year ended December 31, 2006, we incurred $1,278,842 of transitional costs in connection with our acquisition of the Hosted Messaging assets of Critical Path. In addition, during the year ended December 31, 2006, we received $2,347,026 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 $1,300,963 for the year ended December 31, 2006 compared to $814,498 for the year ended December 31, 2005.

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

  Three months ended
December 31,
Year ended
December 31,
  2006
2005

2006
2005
Cash provided by (used in):                
Operating activities:                
 Net income for the period  $ 156,424 $ 1,033,956 $ 2,160,434 $ 2,772,616
Items not involving cash:                
Depreciation of property and equipment   963,952   219,527   2,978,867   951,692
Amortization of intangible assets   296,841   59,040   876,644   236,160
Unrealized change in the fair value of forward exchange contracts   625,487   212,668   574,762   30,119
Stock-based compensation   88,040   -   298,040   -
Change in non-cash operating working capital:                
Interest receivable   -   76,165   39,574   (39,574)
Accounts receivable   2,787,229   (76,442)   (1,475,715)   (328,247)
Prepaid expenses and deposits   (225,711)   (524,722)   141,897   126,763
Prepaid fees for domain name registry and other Internet services fees   (572,163)   (430,973)   (5,801,972)   (3,804,225)
Accounts payable   (111,467)   (60,214)   745,581   171,652
Accrued liabilities   (1,158,124)   (326,808)   44,828   (1,271,703)
Customer deposits   292,691   106,747   867,482   29,375
Deferred revenue   400,162   550,242   7,102,935   4,618,723
Accreditation fees payable   354,150

  302,241
  264,716
  570,297

Cash (used in) provided by operating activities   3,897,511

  1,141,427

  8,818,073
  4,063,648

                 
Financing activities:                
Proceeds received on exercise of stock options   107,648   49,254   206,608   300,870
Net proceeds received on issuance of common stock, net of issue costs   -   -   -   1,574,675
Repayment of promissory note payable   -
  -
  (2,122,930)

  -
Cash (used in) provided by financing activities   107,648
  49,254

  (1,916,322)

  1,875,545
                 
Investing activities:                
Additions to property and equipment   (528,525)   (349,445)   (4,607,774)   (1,477,126)
Decrease (increase) in investment in short-term investments   -   5,999,884   1,771,569   (1,771,569)
Decrease (increase) in restricted cash – being margin security against forward exchange contracts   (756,588)   240,000   (959,423)   400,398
Deferred acquisition costs   -   (46,034)   -   (46,034)
Acquisition of Mailbank.com Inc., net of cash acquired   -   -   (6,486,732)   -
Acquisition of Hosted Messaging Assets, net of cash acquired   (95,532)   -   (7,552,320)   -
Acquisition of Boardtown Corporation, net of cash acquired   (22,200)   -   (44,900)   -
(Increase) decrease in cash held in escrow   107,145
  (2,330)
  (113,867)
  388,238

Cash used in investing activities   (1,295,700)
  5,842,075
  (17,993,447)
  (2,506,093)

                 
Increase (decrease) in cash and cash equivalents   2,709,459   7,032,756   (11,091,696)   3,433,100
Cash and cash equivalents, beginning of period   3,546,933
  10,315,332

  17,348,088
  13,914,988
Cash and cash equivalents, end of period $ 6,256,392
$ 17,348,088

$ 6,256,392

$ 17,348,088
                 
Supplemental information:                
Non-cash investing activity                
Acquisition of property and equipment included in accounts payable   384,270   -   384,270   -
                 
                 
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