market folly

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is John Lewis of Osmium Partners who pitched 3 ideas: Tucows (TCX), Rosetta Stone (RST), and Intersections Inc (INTX).


John Lewis' Value Investing Congress Presentation

•    Launched 2002 in Greenbay California. Up to ~$1B market cap.
•    17.4% annualized since inception.
•    Their process 1- mid single digit of cash flow multiple, 2- well defined market segments, and 3- internal opportunities to reinvest capital in the business or capital structure.
•    Looks at the quality of the business model – porter’s five forces, define high quality businesses as businesses with long term customers, look for 10% EBIT margins and good returns on capital.
•    Don’t take balance sheet risk – no net debt businesses.
•    Invest alongside owner-operators.


•    Tucows (TCX) is the first idea – owns a variety of subscription based businesses. Think he is the small cap version of Singleton – has repurchased over HALF of the company with 7 dutch tenders. Announced a 15% share repurchase in march. Think its worth 22 versus $12.
•    First business is domain wholesale business very sticky and ting – newer business.
•    Very little following.
•    Domain business - $105MM rev, 11% EBITDA margins and 14MM domains. Three legs to the domain business – yummy names is an exceptional business. Cost basis is less than a dollar and sell them for $1500 - $1800 if they sell it.
•    Two interesting catalysts – GoDaddy was taken private at 2x sales. IPO in third quarter 3-4 sales.
•    Demand Media Spinoff is a comp – thinks it will spin for 1.5x sales.
•    Domain business worth between $10.7 - $17.
•    Ting – mobile wireless carrier. Retention rate is equal to contractual operators like Sprint ,AT&T. 
•    Believes the industry is ripe for disruption. Ting leverages Sprint’s network (MVNO).
•    Ting subscribers are up 380% YoY. Gives someone a $5 Starbucks gift card if they compare their bill to Ting.
•    Churn is 7% - ARPU is $21. $900 in lifetime revenue per customer. Generating an estimated 9x return on customer acquisition costs.
•    Think Ting is worth $10.5 using a DCF
•    Believe the business is worth $22MM per share or 75% upside.


•    Rosetta Stone (RST) is the next idea. 
•    Tremendous amount of progress.
•    Perception that they have lost market share – spends $200MM a year in R&D and control distribution – invested $1B in building the brand
•    Perception: Dying CD Business – CD business is in decline – worth only $4 per share.
•    Low margin business perception – maintenance R&D is $10MM, growth RD is ~$30MM.
•    Thinks Adobe is a similar story – from shrink wrapped product business to subscription, LT relationship SaaS business.
•    Hidden asset: Global E&E business – a lot of growth. 100% subscription as a service business with 80% renewals and high margins. Peers trade 4-6x sales, and a lot of M&A. 3x sales for the E&E business – 100% upside. M&A comps around 3x sales.
•    Key part of the business is distribution.
•    Acquired a freemium business – RST bought it below the price it cost to set up at customers at .50 cents – with cross sales already materializing. 
•    Purchased Lexia Learning, Tell Me More and Vivity Labs at attractive multiples.
•    Value CD business at half of sales 
•    SOTP of $28 


•    Next idea is Intersections Inc.  (INTX)
•    Thrown off lots of FCF – bought back shares – a cannibal.
•    Management and board own half of the Company.
•    14% dividend yield
•    BofA is 50% of the total business or $266MM in sales.
•    BofA component priced at 1x cash flow or run-off or $2.5. Shorts think the BofA is the entire business – false. Broke out identity guard- better offering than LifeLock and its compliant/ethical versus LifeLock.
•    Customer acquisition costs  - pay back period is 6 months. $42MM run-rate. Osmium believes it should be worth 15x EBITDA given its high margin profile this would be $6.5 per share. This is  reasonable given zero customer concentration, mid-teen EBITDA marginsand double digit growth (20%+).
•    Pet monitoring device Voyce – complete optionality. 
•    Put in the Oscar “Swag” Bag – a large range of outcomes.
•    $11MM in invested capital.
•    Management has been accurate in forecasting.
•    Followed this Company for six years – in 08 the worst year they were only off by 1% in regards to their forecast.
•    SOTP - $12 per share or a double.

Be sure to check out the rest of the Value Investing Congress presentations.