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Tucows - Has a deferred problem

Tue, 12 Feb 2008 11:49:00 -0400

Tucows (AMEX:TCX) has lost 50% of its market value since July 2007. Yes it has dropped from $1.26 to $0.63 a share, a 50% drop over the last six months.

The Company just released it’s year end financial statement, so now is a good time for a quick review of the basics:

- Annual revenues were $74.6 M vs. $65 M for the previous year – up 14%, nothing wrong there.
- Net Income $2.6 M vs. $2.1 M – up 24% -- direction is good.
- EBITDA $8.7 M vs. $5.8 M – up 50% -- something to write home about.

Tucows has a market cap of $46.5 million. The overall value could be stated as:

- 5.3X EBITDA
- .62X trailing revenues.
- PE Ratio 18.68

So why is Tucows trading so low? Why has it dropped a whopping 50%? As a high tech firm it deserves at least a 40 P/E ratio. It should be trading at a 1X revenue range, frankly more. That would take it back the July stock price.

The problem is the Tucows balance sheet. The Company has $80 million in liabilities. How is Tucows going to make it? Given current EBITDA one could take almost 10 years to pay it back, not including interest. The game is over; tank the deal, time to trade out.

WRONG WRONG WRONG ---- Tucows needs more liabilities, I think liabilities should go through the roof. They should be the master of liabilities; the street just doesn’t get it.

Financially speaking there are not many firms like Tucows. They sell millions of little things, sort of like Coca Cola. However those little things are domain names, selling for lets say $12. Since they are paid “up front” for a specific period, usually one year, the revenues for these are recognized at $1 per month, not the $12 when the transaction occurred. Sort of like cash vs. accrual accounting.

The bulk of the liabilities time out in one year, when hopefully, they start all over again. Look at it as millions of itsy bitsy revolving loans.

Of the $80 million in liabilities, $50 million (63%) is tied to deferred revenues resulting from domain registration sales. Domain name registrations account for 73% of revenues.

Usually I hate deferred revenues (which is a topic for a separate writing). However for Tucows it is the business model.

I might be naive, but I don't think many people drive up to Tucows and say..."I stopped using my domain name...I want my $3 back". I have a hard time rationalizing how GAAP, in the practical world, should apply here.

Tucows – Has a deferred problem. One the street does not understand, and one I think is holding the stock price down.

========== MORE ABOUT TOM ==========

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Are We Running Out of Storage Space? IDC is Concerned, but Maxell Says Never Fear

Tue, 13 Mar 2007 14:15:00 -0400

I learned about the IDC storage paradox on Zoli Erdos' blog. Zoli mentions this Associated Press article, which cites IDC's estimate that "the world had 185 exabytes of storage available last year and will have 601 exabytes in 2010. But the amount of stuff generated is expected to jump from 161 exabytes last year to 988 exabytes in 2010".

Even more alarmingly, Dan Farber over at ZDNet reports that according to IBM, "the world's information base will be doubling in size every 11 hours" by 2010. Does this mean that on Jan 1, 2011, our 988 exabytes of data will double to 1,976 exabytes by 11am, and 3,952 exabytes by 10pm?

Fortunately, we don't need permanent storage for all the data we generate. For instance, spam accounted for just 8% of all emails in 2001 (said CNet); its volume rose to 36% by 2002 and 66% by 2004 (MSNBC), and is expected to exceed 90% by the end of this year (IT News). That's a huge amount of data that isn't being saved.

Still, Rich D'Ambrise from Maxell says he expects significant growth in data archiving requirements: in 2007, we will back up 75% more data than we did in 2006. But unlike IDC analyst John Gantz, he's not concerned that we'll run out of space. The storage industry is not standing still. Maxell, for instance, is beta testing 300 GB holographic disks that are no bigger than a DVD, but offer 63x more capacity. 800 GB second generation disks should be on the market by next year, and a 1.6 TB version is planned for 2010. And let's not forget stacked volumetric optical discs (SVOD); each 92-micrometer layer stores up to 9.4 GB. Available storage capacity will absolutely keep up with demand; no question about that!

The real issue is, will we store our zettabytes of data on- or offline? Rich is betting on removable media; he'd rather have mission critical data in his own possession than depend on any service provider. Zoli, on the other hand, says online is more efficient. By sharing/linking to files, we won't each need space for our own copies of the same content. Sun CEO Jonathan Schwartz says offline storage is greener ("when data's at rest, it consumes no electricity") - and easier to transport on a large scale. (As the New Yorker points out, if you made tiny chariots with DVD wheels and hitched them to snails, you'd get faster data transfer speeds than DSL.)

So, what's this got to do with web hosting? For one, you should probably monitor your oversold disk space closely. At the moment, I'm sure hardly any of GoDaddy's $7 hosting customers are using their entire 100 GB quota. But if you consider Rich's 75% growth projection, the number of customers that same 100 GB is allocated to may have to come down.

PS - Here's a GigaOM post on a 10 more fun storage facts.

Almost everyone has heard of web servers but most people don’t actually know what they are! In a certain sense a spider is a web server but that is not the kind of web server we have in mind. This article explains in simple terms what an internet web server is and also explains why they are so important for the efficient functioning of modern websites.







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