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April 30, 2013 – Comments (5) | RELATED TICKERS: TCX

Board: Value Hounds

Author: ajm101

Founded in 1992, they are an old internet company with a twist. I believe the name was an acronym for "The Ultimate Collection Of Winsock Software" - it used to be a shareware download site (when those mattered).

They have several lines of business. First they are a smaller and less skeezy GoDaddy - domain registrations/renewals and hosted services (email, websites, certificates, etc) which they offer wholesale (OpenSRS) and retail (Hover). The wholesale business has some value added offerings in CMS and billing (Platypus). They also do domain parking/ad sales ('Portfolio') which I consider a wasting business. Finally (and why I'm interested in them) they operate an MVNO called Ting (phone service, think Boost Mobile or Leap).

Historically, domain registration and services have been the bulk of business - between 85-90% of revenue. It is growing, but not rapidly, and is nice profitable (gross margin 20-25%).

Ting has only been around since the beginning of 2012, but it caused the revenue in its reporting segment (Retail) to double from $5M to $10M from 2011 to 2012. According to the FY12 conference call, the gross margins there are 40-50% (http://seekingalpha.com/article/1182351-tucows-ceo-discusses...). This is material for a company with an $85M market cap.

Spitballing it, they doubled subscribers from end of 2012 Q3 to end of 2012 Q4 to 10K and expect the absolute growth in subs to hold up. I think that could be 40K subscribers by the end of 2013. Assuming acquisition costs stay near $100, revenue/sub is $600, and stable gross margins, that's $8-10M more annualized gross profit by the end of the year.

They are not expensive, either: P/S .75, negligible net debt, P/E of 20, and EV/Operating Cash flow ~ 14. Almost nobody is betting against them, the short ratio is 0.2 and TCX isn't heavily traded. They are shareholder friendly, and have been actively buying back stock without the massive dilution common in other technology companies.

I know it's not everyone's cup of tea here (microcap, tech), but it's a value stock. Particularly if you take growth at Ting into account.

Any feedback or criticism would be warmly welcomed. Also, side note, I found Ting before I found Tucows. Sometimes I buy stock in companies I pay that I hate - FBF was a great example before BAC took them over - so the dividend can lessen the sting. I this case, though, I love Ting/Tucows. I could go on and on about how great their service is, but I'll spare everyone.

5 Comments – Post Your Own

#1) On April 30, 2013 at 2:39 PM, Mega (99.96) wrote:

MVNO is a lousy business model, especially in the US. Most are unprofitable and even the largest MVNOs like TracFone don't earn very good margins.

http://www.strandreports.com/sw4269.asp
http://gigaom.com/2006/03/02/mvnos-not-making-money-surprised/

"Gross margin remains in the 40% to 45% range"

But on the other hand:
"As a percentage of revenue, retail services gross margin was 32% compared with 62% for the fourth quarter of 2011, with the decrease primarily resulting from the sale of Ting devices at or slightly below the cost as well as the lower gross margin generated by Ting services.

To help frame the impact Ting has on our retail numbers, I will note that Ting device sales for the fourth quarter this year, accounted for $1.1 million of our retail revenue and $1.4 million of our retail cost of goods sold."

So "at or slightly below cost" is a euphemism for -27% gross margins on devices.

For 2012, it sounds like operating margins were -2.5% (see pages 38 through 40 of the annual report). Actually, I'm suprised they're not worse.

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#2) On April 30, 2013 at 2:53 PM, Mega (99.96) wrote:

That said, I wouldn't be suprised if the market rewards rapid growth at Ting over the next few years (even if it's not profitable).

But with negative tangible book value, it's definitely a speculative growth stock, not a value stock.

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#3) On April 30, 2013 at 6:07 PM, ajm101 (31.97) wrote:

Thanks megashort.  I definitely didn't expect to see a POD on this or I would have written it up a little better.  In a follow up post in Value Hounds I alluded to the low valuation that's assigned to LEAP (the only other public MVNO I'm aware of).  My hope is that Ting is able to avoid the problems of other MVNOs via their use of technology, their affiliate model for acquiring customers, and not doing prepaid cards.

I would kind of quibble with you, though.  I don't see device sales as any kind of core business and don't really care about low/slightly negative margin on them. To the contrary, I see it as a loss leader to getting customers on the higher margin phone service.  Assuming they keep churn low you'd expect the effect of that kind of model to be the most pronounced on gross margins during early phases when the number of subs is low and the number of activations is high.

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#4) On May 01, 2013 at 12:50 PM, Mega (99.96) wrote:

I would kind of quibble with you, though.  I don't see device sales as any kind of core business and don't really care about low/slightly negative margin on them. To the contrary, I see it as a loss leader to getting customers on the higher margin phone service.  Assuming they keep churn low you'd expect the effect of that kind of model to be the most pronounced on gross margins during early phases when the number of subs is low and the number of activations is high.

I agree with all of that, I was just pointing out that -27% is not "slightly" negative. And they emphasize 40% gross services margin which is a nice big headline number, but deemphasize other useful metrics for determining how good a business it is. Ting might end up a good business but it will take more time and better disclosure to determine that.

Other than not liking the MVNO business model, I don't know much about the company. Looking more closely at the balance sheet, I see that they have a reasonable cash position despite the negative tangible book. But, unlike their other lines of business I expect Ting will consume FCF, especially if it grows quickly. Cash will be an area to keep an eye on.

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#5) On May 01, 2013 at 5:20 PM, ajm101 (31.97) wrote:

Megashort - can't thank you enough for the feedback.  I think I'm going to have to channel Peter Lynch a bit and just say that I think Ting will fair better than other MVNOs :) 

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