Tucows: Too Good to Ignore

Tucows (Amex:TCX) may be best known for its eponymous website that distributes freeware and shareware, but most of Tucows’ revenues come from its Open SRS domain platform. At heart, Tucows is a domain registration business whose fortunes will rise and fall with the vitality of the internet, the margins of domain registrars, and its ability to protect and take market share.

Wednesday, Tucows reported Q2 2009 revenues of $20.0 million, down slightly from $20.5 million for Q2 2008, and net income of $4.5 million, or $0.07 per share, up from $2.2 million, or $0.03 per share, last year. The earnings were not all from operations — there were unusual gains of $2.0 million from the sale of an equity investment, $0.6 million related to assignment of patents, and $1.6 million from foreign currency exchange effects (note: last year’s results also benefited from some one-time gains).

Back all these items out, together with a tax expense net of R & D credits of $0.6 million, and adjusted earnings drop to about $900,000, or just above a penny per share. That’s a very clean, conservative number.

But the real strength of Tucows can be seen in other metrics:

• cash is up to $7.4 million, compared with $2.9 million in 2008. About half of the gain was from the investment sale; the remainder from operating cash flow (including $2.6 million operating cash flow this quarter).
• deferred revenue was $56.9 million, up 4.6% from last year. Deferred revenues are a great measure of the Open SRS domain registration business. When someone registers a domain they usually pay for a year or two in advance. Those revenues, and the associated expenses, are recognized pro rata over the length of the registration. The remaining revenues go into an accounting entry called deferred revenues, and the remaining expenses go into an entry called prepaid registry fees. The deferred revenues substantially exceed the prepaid fees, which will support future income as they are recognized in future quarters.
• shareholders’ equity stood at $25.24 million, up significantly from $21.45 million last year.

In the earnings call (transcript courtesy of Seeking Alpha), CEO Noss commented:

the second quarter, like the first, was a good solid quarter. Operationally, we are executing well and we are winning business from our competitors. We continue to add large customers and are making good progress on redesigning open SRS to be a success with even the smallest of service providers. Our costs are well under control and we are seeing the benefits from the work we have done over the past couple of years on operational and capital expenditures.

I talked previously about 2009 looking a lot more like 2007 than 2008 from a cash flow from operations perspective and the first half of the year has proven that out. And I note that in terms of free cash flow we expect capex to come in at less than half that of 2007.

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DISCLOSURE: Long TCX.

Comments

[rpl:]

Don't forget the 3rd announced dutch auction to buyback stock.

Aug 14 04:47 PM