Tucows Reports Strong Second Quarter Fiscal 2006 Results

Company Reports Record Revenue, Doubling of Adjusted EBITDA, Nineteenth Consecutive Quarter of Positive Cash Flow from Operations

TORONTO, Canada – August 8, 2006 – Tucows Inc. (AMEX:TCX, TSX:TC) today reported financial results for the second quarter of fiscal 2006 ended June 30, 2006.

Highlights for the second quarter included:

  • Successful completion of the acquisition and integration of Mailbank.com Inc. (NetIdentity);
  • A 31% year-over-year increase in net revenue to a record $15.7 million;
  • Net income of $0.2 million, notwithstanding $0.5 million of transitional costs related to the Critical Path hosted messaging asset acquisition;
  • Adjusted EBITDA growth of 120% to $1.8 million;
  • Cash flow from operations of $3.2 million, the Company‚Äôs nineteenth consecutive quarter of positive cash flow from operations;
  • An 18% year-over-year increase in deferred revenue to a record $43.2 million; and
  • The addition of three large hosted email customers.

‚ÄúOur continued strong results for the quarter were driven by contributions across our range of service offerings, with almost 50% of gross margin generated by Internet services other than domain names,‚Äù said Elliot Noss, President and Chief Executive Officer, Tucows Inc. “Our revenue growth was driven about equally by organic growth and the contributions of our acquisitions. Our hosted email business continues to perform above expectations following the Critical Path asset acquisition. During the quarter, we added three significant customers. This is a testament to the strength of Tucows‚Äô reputation, the value of the acquired platform and our customer relationships. At the same time, we are seeing continued leverage in our business model as evidenced by the decrease in our operating expenses as a percentage of revenue.‚Äù

Summary Financial Results

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

3 Months Ended June 30, 2006 3 Months Ended June 30, 2005 6 Months Ended June 30, 2006 6 Months Ended June 30, 2005
Net Revenue 15,679 12,002 30,966 23,804
EBITDA 1,001 747 1,435 1,261
Adjusted EBITDA 1,759 800 3,265 1,818
Net Income 226 508 69 950
Net Income/Share 0.00 0.01 0.00 0.01
Cash Flow from Operations 3,220 1,475 5,054 2,130

Net revenue for the second quarter of fiscal 2006 increased 31% to $15.7 million from $12.0 million for the second quarter of fiscal 2005. The increase was primarily the result of the acquisition of the hosted messaging assets of Critical Path, Inc., as well as a higher number of domain transactions and higher revenue from Internet services.

Net income for the second quarter of fiscal 2006 was $0.2 million, or $0.00 per share (notwithstanding $0.5 million of transitional costs related to the Critical Path hosted messaging asset acquisition) compared with $0.5 million, or $0.01 per share, for the second quarter of fiscal 2005. Adjusted EBITDA for the second quarter of fiscal 2006 doubled to $1.8 million, or 11.2% of net revenue, from $0.8 million, or 6.7% of net revenue, for the corresponding quarter of last year.

Deferred revenue at the end the second quarter of fiscal 2006 was $43.2 million, an increase of 18% from $36.6 million at the end of the second quarter of fiscal 2005 and an increase of 5% from $41.1 million at the end of the first quarter of fiscal 2006.

Cash, short-term investments and restricted cash at the end of the second quarter of fiscal 2006 decreased to $7.0 million from $15.8 million at the end of the second quarter of fiscal 2005 and $11.8 million at the end of the first quarter of fiscal 2006. The decrease compared to the end of the first quarter of fiscal 2006 is primarily the result of cash payments of $5.8 million for part of the purchase price of Mailbank.com Inc. (NetIdentity). The Company also invested $2.4 million in property and equipment, primarily to improve its Internet services infrastructure to take advantage of hosted email opportunities that are materializing earlier than expected and to strengthen the integrity of its network. These investments were partially offset by positive cash flow from operations for the quarter of $3.2 million.

Cash flow from operations for the second quarter of fiscal 2006 included cash provided by working capital and other activities of $2.4 million and reflects changes in accounts receivable, accounts payable, accrued expenses, deferred revenue and prepaid domain name registry fees. The increases in accounts receivable and accounts payable were largely due to the Critical Path asset acquisition. Accounts payable was also impacted by the aforementioned investment in infrastructure. The Company does not expect these levels of accounts receivable and accounts payable to continue.

EBITDA and Adjusted EBITDA

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.

Adjusted EBITDA represents EBITDA plus the additional adjustments described in the table below. Adjusted EBITDA 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 and deferred, net of prepaid fees. In addition, adjusted EBITDA reflects earnings and expenses considered as non-representative of ongoing business for the reasons specified below. Adjusted EBITDA is one of the primary measures the Company uses for planning and budgeting purposes and to monitor and evaluate Tucows’ financial and operating results. Adjusted EBITDA 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.

Conference Call

Tucows will host a conference call today, Tuesday, August 8 2006, at 5:00 p.m. (ET) to discuss the Company’s second quarter 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 1-800-408-3053 or 416-695-5800 and enter the pass code 3194148 followed by the pound key. The telephone replay will be available until Tuesday, August 15, 2006, 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
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)

June 30,
2006


December 31,
2005

(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 6,539,713 $ 17,348,088
Short-term investments - 1,771,569
Restricted cash 422,458 60,000
Interest receivable 5,027 39,574
Accounts receivable 3,658,609 1,439,329
Prepaid expenses and deposits 2,830,814 1,999,820
Prepaid domain name registry and other Internet services fees, current portion 21,142,361 18,175,988
Cash held in escrow 584,382 -
Deferred tax asset, current portion 1,000,000
1,000,000
Total current assets 36,183,364 41,834,368
Prepaid domain name registry and other Internet services fees, long-term portion 8,907,236 7,701,939
Deferred acquisition costs - 46,034
Property and equipment 5,654,796 1,542,671
Deferred tax asset, long-term portion 2,000,000 2,000,000
Intangible assets 18,848,118 1,006,080
Goodwill 5,694,046 1,951,067
Investment 353,737 353,737
Cash held in escrow 1,781,342
621,412

Total assets $ 79,422,639
$ 57,057,308
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 5,405,505 $ 1,655,195
Accrued liabilities 3,009,736 1,417,035
Customer deposits 2,844,894 2,276,637
Deferred revenue, current portion 30,608,344 26,790,166
Accreditation fees payable, current portion 505,539 651,811
Note payable 2,122,930
-
Total current liabilities 44,496,948 32,790,844
Deferred revenue, long-term portion 12,621,678 11,079,537
Accreditation fees payable, long-term portion 132,222 94,785
Note payable 6,000,000 -
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; 75,667,220 shares issued and outstanding at June 30, 2006 and 71,945,303 shares issued and outstanding at December 31, 2005 15,265,182 12,403,422
Additional paid-in capital 50,210,366 50,061,866
Deficit (49,303,757)
(49,373,146)
Total stockholders’ equity 16,171,791
13,092,142
Total liabilities and stockholders’ equity $ 79,422,639
$ 57,057,308


Tucows Inc.
Consolidated Statements of Operations
(Dollar amounts in U.S. dollars)
(unaudited)
Three months ended
June 30,
Six months ended
June 30,
2006

2005
2006
2005
Net revenues $ 15,678,856 $ 12,002,138 $ 30,965,976 $ 23,803,844
Cost of revenues:
Cost of revenues (*) 10,066,262 7,586,612 19,994,116 14,807,817
Depreciation of property and equipement 669,256 124,143 1,194,175 206,080
Amortization of intangible assets 38,538
-
77,078
-

Total cost of revenues 10,774,056
7,710,755
21,265,369
15,013,897
Gross profit 4,904,800 4,291,383 9,700,607 8,789,947
Operating expenses:
Sales and marketing (*) 1,572,290 1,166,058 3,031,446 2,518,511
Technical operations and development (*) 2,090,723 1,356,058 4,411,439 2,678,843
General and administrative (*) 948,464 1,146,725 2,567,517 2,537,487
Depreciation of property and equipment 45,041 152,726 82,091 312,663
Amortization of intangible assets 112,591
59,040
205,884
118,080
Total operating expenses 4,769,109
3,880,607

10,298,377
8,165,584
Income (loss) from operations 135,691 410,776 (597,770) 624,363
Other income:
Interest income, net 102,662 96,856 205,553 174,104
Other income -

-
473,606
-
Total other income 102,662
96,856
679,159

174,104
Income before provision for income taxes 238,353 507,632 81,389 798,467
Provision for (recovery of) income taxes 12,000 - 12,000 (151,975)

Net income for the period $ 226,353
$ 507,632
$ 69,389
$ 950,442
Basic earnings per share $ -
$ 0.01
$ -
$ 0.01
Shares used in computing basic earnings per common share 72,527,662
65,991,867
72,555,539
67,376,440

Diluted earnings per share $ -
$ 0.01

$ -
$ 0.01
Shares used in computing diluted earnings per common share 74,704,791
68,744,679
74,540,626
71,763,526
(*) Stock-based compensation has been included in operating expenses as follows:
Cost of revenues $ 3,100 $ - $ 5,500 $ -
Sales and marketing $ 18,600 $ - $ 36,000 $ -
Technical operations and development $ 27,300 $ - $ 51,000 $ -
General and administrative $ 29,300 $ - $ 56,000 $ -

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

Three months ended
June 30,
Six months ended
June 30,
2006
2005

2006
2005
Net income for the period $ 226,353 $ 507,632 $ 69,389 $ 950,442
Depreciation of property and equipment 714,297 276,870 1,276,266 518,743
Amortization of intangible assets 151,129 59,040 282,962 118,080
Interest income, net (102,662) (96,856) (205,553) (174,104)
Provision for (recovery of) income taxes 12,000
-

12,000
(151,975)
EBITDA 1,001,117
746,686

1,435,064
1,261,186
Adjustments to EBITDA (1)
Change in prepaid fees for domain name registry and other Internet services fees (1,858,622) (835,394) (4,171,670) (2,837,609)
Change in deferred revenue 2,151,830 888,976 5,196,350 3,394,465
Transitional costs 464,579 - 1,278,842 -
Other income -
-
(473,606)
-

Subtotal Adjustments to EBITDA 757,787
53,582
1,829,916
556,856

Adjusted EBITDA $ 1,758,904

$ 800,268
$ 3,264,980

$ 1,818,042
(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 six months ended june 30, 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 six months ended June 30, 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 $1,024,680 for the six months ended June 30, 2006 compared to $556,856 for the six months ended June 30, 2005.

Tucows Inc.
Consolidated Statements of Cash Flows
(Dollar amounts in U.S. dollars)
(unaudited)
Three months ended
June 30,
Six months ended
June 30,
2006
2005
2006
2005
Cash provided by (used in):
Operating activities:
Net income for the period $ 226,353 $ 507,632 $ 69,389 $ 950,442
Items not involving cash:
Depreciation of property and equipment 714,297 276,870 1,276,266 518,743
Amortization of intangible assets 151,129 59,040 282,962 118,080
Unrealized change in the fair value of forward exchange contracts (378,846) - (195,902) 107,628
Stock-based compensation 78,300 - 148,500 -
Change in non-cash operating working capital:
Interest receivable (3,047) - 34,547 -
Accounts receivable (335,071) (8,380) (2,162,713) (159,977)
Prepaid expenses and deposits (24,292) 83,467 (20,879) 410,803
Prepaid fees for domain name registry and other Internet services fees (1,858,622) (835,394) (4,171,670) (2,837,609)
Accounts payable 2,577,875 (103,675) 3,070,542 (60,713)
Accrued liabilities (259,966) 335,452 1,067,114 (675,339)
Customer deposits 420,423 (30,742) 568,257 (108,869)
Deferred revenue 2,151,830 888,976 5,196,350 3,394,465
Accreditation fees payable (240,100)

301,495
(108,836)
472,352
Cash provided by operating activities 3,220,263
1,474,741
5,053,927

2,130,006
Financing activities:
Proceeds received on exercise of stock options 27,401
5,416
55,410
186,439

Cash provided by financing activities 27,401
5,416
55,410
186,439
Investing activities:
Additions to property and equipment (2,405,146) (625,169) (3,291,425) (826,077)
Decrease (increase) in investment in short-term investments 72,000 (7,771,453) 1,771,569 (7,771,453)
Decrease (increase) in restricted cash – being margin security against forward exchange contracts 190,042 - (362,458) 460,398
Acquisition of Mailbank.com Inc., net of cash acquired (5,830,902) - (5,830,902) -
Acquisition of Hosted Messaging Assets, net of cash acquired 163,969 - (6,419,485) -
(Decrease) increase in cash held in escrow (18,507)
396,604
(1,785,011)
392,888

Cash (used in) investing activities (7,828,544)
(8,000,018)
(15,917,712)
(7,744,244)
Decrease in cash and cash equivalents (4,580,880) (6,519,861) (10,808,375) (5,427,799)
Cash and cash equivalents, beginning of period 11,120,593
15,007,050
17,348,088
13,914,988
Cash and cash equivalents, end of period $ 6,539,713
$ 8,487,189

$ 6,539,713
$ 8,487,189
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