- feel free to disagree or ask Q's

From Forbes.com

Price:  13.44  as of 5/31/10

Gross Profit Margin  57.9%
EBIT Margin  37.0%
EBITDA Margin  44.8%

Current Ratio  15.4
Quick Ratio  14.1

ROE from Total Operations  16.8%
Return on Invested Capital  16.8%
Return on Assets  15.7%

Book Value per Share  $7.33
Tangible Book Value per Share  $7.33
Price/Tangible Book Ratio  1.83
Cash per Share  $5.18  (it's actually 5.62 when you add a security that is as good as cash)

Cash Flow per Share  $1.67
Free Cash Flow per Share  $1.18

Price/Cash Flow Ratio  8.0
Price/Free Cash Flow Ratio  11.4


Net Profit Margin (Total Operations)  16.6%


TNDM

Neutral Tandem came up with a very original name.  The are a "Neutral" provider of "Tandem" switching to the phone industry. That took a lot of thought (yes, that was sarcasm).  That's where I stopped making fun of them.  They WERE very original in starting the business. 

The original problem was,  two competing phone companies didn't want to make it easy for their competitor to connect to their network and vice versa, apparently the cell providers don't like each other much(did you ever see the Verizon and ATT commercials).  They needed someone neutral, a referee if you will, and therein lies the genius. Neutral Tandem was born.

This SHOULD be a very boring and highly profitable business.  It is highly profitable.  But recently not boring.

What they actually do, is to provide a network of switches for cell phone companies to complete calls between one another. For example if Sprint wants to connect calls to ATT they use Neutral Tandem's service as a go between to complete the call for their respective customers.  Neutral Tandem bills each one appropriately for the minutes used (they are in effect a toll bridge) - they get direct revenue for each minute used.  (Minutes used) times (rate per minute) is how to determine revenue for the company at present.  As always, one of the best ways to evaluate a company is by the relevant numbers - in this case - it is minutes used, average fee per billed minute, revenue, profit, and CAPEX/OPEX(costs).

In essence this is a commodity business, TNDM is the low cost provider that has benefits from the network effect. They add on extra services that are desirable to each telco client. (a definite differentiator for the future in my view)


This company started in 2003.   P.S. I wish I knew how to make graphs, but I don't, so ----


Billed minutes by year: (in Billions)

From 2004 until the end of 2010

2004 - 1
2005 - 10
2006 - 25
2007 - 41
2008 - 61
2009 - 88
First Q of 2009 - 19,669
First Q of 2010 - 24,725        25.7% growth Q over Q         


Revenue: 2004-present (in Millions)
2004 - 3
2005 - 28
2006 - 53
2007 - 86
2008 - 121
2009 - 169
First Q of 2009 - 38.3 
First Q of 2010 - 44.8   17% growth Q over Q


Average fee per billed minute
2007 -                $0.0021
2008 -                $0.0020
2009 -                $0.0019
First Q of 2010 - $0.0018

Net Profit (in Millions)

2005 - (.47)
2006 - 4.67
2007 - 6.3
2008 - 24
2009 - 41.3
First Q of 2009 -  9.04       
First Q of 2010 -  8.47



Risk Factors from TNDM's K's and Q's -
----------------------------------------------------------------------------------------------

We face competition from the traditional ILECs (traditional land line phone companies) and increasing competition from certain other providers such as Level 3 Communications, Peerless Network and Hypercube and expect to compete with new entrants to the tandem services market.

If we are not able to obtain and enforce patent protection for our methods and technologies, or prevail in our pending patent infringement action against Peerless Network, competitors may be more easily able to compete with us, our ability to successfully operate our network may be disrupted and our ability to operate our business profitably may be harmed.
-------------------------------------------------------------------------------------------------

   "THE BIG SCARE" -- They lost the lawsuit over their patent for legacy tandem devices, technically it's not done yet, but effectively, they lost. This was important for the stock (it was the big scare, remember)    but relatively unimportant for the company.
   They hardly use them anymore, the technology has moved on to IP switches (which brings along other problems discussed later).

-----------------------------------------------------------------------------------------------

Check out the last Q numbers for net profit and the last three years+ of minutes billed - this is what made Mr. Market really soil his drawers. (In his mind, this company is going down the tubes)


This is something we need to figure out!


   Straight from the March 2010 10Q - relevant data

   Operating Expenses  . Operating expenses for the three months ended March 31, 2010 of $30.7 million increased $6.4 million, or 26.1%, from $24.3 million for the three months ended March 31, 2009

   Network and Facilities Expenses.  Network and facilities expenses increased to $14.4 million in the three months ended March 31, 2010, or 32.0% of revenue, from $11.5 million in the three months ended    March 31, 2009, or 30.1% of revenue

   Operations expenses increased to $5.5 million in the three months ended March 31, 2010, or 12.3% of revenue, from $5.0 million in the three months ended March 31, 2009, or 13.1% of revenue

   General and Administrative Expense.  General and administrative expense increased to $6.4 million in the three months ended March 31, 2010, or 14.3% of revenue, compared with $3.4 million in the three    months ended March 31, 2009, or 8.9% of revenue. The increase in our general and administrative expense is primarily due to an increase of $1.7 million in payroll and benefits, and $1.3 million in professional    fees.

   Net cash provided by operating activities was $19.0 million for the three months ended March 31, 2010, compared to $16.9 million for the same period last year

   For the three months ended March 31, 2010, we increased revenue to $44.8 million, an increase of 17.2% compared to the three months ended March 31, 2009



So why is revenue up (17.2%) and profit down??? They only added 9 new network locations (to 146  total)  - the same as their average per Q before, why did costs rise so quickly??

Well, this is where the new business comes in.  They are getting into Carrier Ethernet Exchange.  They spent 7M between CAPEX/OPEX on the new business.  They are spending money on the new business now and won't see the revenues until  6-12 months down the road. P.S. I heard from Mr. Quick Trade (Mr. Market's cousin) that he hates waiting 6-12 months for his return.

Hmmm, now it makes sense!

If you know what Carrier Ethernet Exchange is. 

From my pedestrian view (remember, I'm no expert) it acts like a direct link between two distant network locations.  For reference look up the difference between an ethernet (which is like an office or building network) compared to the internet.  As an example say a bank has 5 locations - they want to connect their individual networks (from each branch) to one another.  They don't want to "just" do it over the old internet, it's too slow and crowded, not to mention the safety factor.  They need a dedicated link between the two, this is an "Ethernet Exchange" - it is eerily similar to a giant phone call that is always connected.

Well guess who is an expert on large phone call traffic from distant location to location?  Did I mention that almost all of the same places that TNDM has their network locations are the same exact places that they need to do this "Ethernet Exchange"?  They even have their own fiber backbone (which is fiber optic cable connected around the country) that their competitors don't (a nice cost advantage).  They sell Ethernet Exchange as a data package per connection (example 10Mb) which is priced by how much data transfer is needed.  They could sell the 5 banks "one package" for each location, as one alone isn't good enough, each location must have at least one and possibly more if it's really big bank.

TNDM has recently deployed a test network in 14  major markets, this is where the additional CAPEX/OPEX costs come in.  Ethernet Exchange is a very new concept, put another way, no one has a clue how it will turn out or even how it will ultimately work the way they planned.  TNDM is "branding" theirs, they are starting a network with select (their present and some new) clients to see how it will work and are going to try and force it as a standard, much like internet standards. (WARNING: This is my personal interpretation of the subject from MANY late nights listening to industry presentations on the internet, this is a guess and the entire industry doesn't even know what it wants to do yet.)

This could be a major advantage for a first mover (or they could screw it up, I "trust" they know what they're doing by past performance).  The competition (CENX, L3, Equinix, et al.) isn't deploying this as a "network", they are doing it more on a point to point basis. TNDM wants to start "THE Ethernet Exchange".

As another advantage, TNDM is paying for it's growth from operating profits, a definite plus, while the others are using debt (they even bought back their stock this Q).  Equinix on the other hand is deep in the hole.

My view of the competitors for Ethernet Exchange:

In general, everyone is taking a different view on how to accomplish ethernet exchange - initially this is great, as there will be little or no competition (my view again).  Customers don't want to commit totally to any one provider, as everything is as yet undecided. Equinix is going after the big fish - international customers, L3 just seems confused as to what they are doing (they do a lot of gov't military contracting, so maybe they don't/can't talk about it much), and CENX (as their main competition for targeted small and medium sized customers, ironically has ex-TNDM execs) is too small and doesn't have much funding as of yet.(I believe that they could get it easily from angel investors/venture capitalists)


----------------------------------------------------------------------------------------------

I will give a breakdown of the negatives and positives of this company with an explanation of each to the best of my knowledge.  I am no expert on telecom -- please review the information with this in mind.  I have spent countless hours trying to understand this company and especially the tech involved (about 140+ hours to present) and I feel I have a handle on 80-90% of it, but I could be very wrong. The business is deceptively simple and complicated at the same time.

Negatives:

The largest first -

1. The main business of tandem switching could be accomplished by the companies themselves. The direct problem comes from the migration from legacy tandem switches(remember the lawsuit) to IP switches, TNDM for itself completed the upgrade in April 2009 (this will lower TNDM's cost and allow for better control of their network, making customers happy).

Any one of their customers could make agreements and connections between themselves thus cutting TNDM out of the business. This is a relevant threat, but this is also complex and inefficient for the companies to do.  They derive a cost savings using TNDM's service.  The savings, for the phone companies, comes from the cost for the companies to interconnect with each and every other phone provider. In other words they each have to set up a switch in every location -- every phone company has to set up a switch at every location (possibly hundreds) vs TNDM setting up one.

The danger to TNDM is in the fact that an IP switch is software based which is easily changeable vs the legacy tandem switch which is a physical switch.  This is the REAL "Big Scare" that not many talk about.

As of yet it is undetermined how this will play out. This may become similar to Ethernet exchange in the future where telcos aren't billed by the minute but for a "data package" much like phones are billed by unlimited plan instead of minutes. (the phone companies "plan" won't be unlimited, they will still pay for the amount of data transfer they need like the data package)

2. Competitors are previously described, I'm guessing there will be more eventually.  They should be thought of as Ethernet (greater threat) and tandem connections (lesser).

3. The Ethernet Exchange business is (somewhat) capital intensive and doesn't benefit as largely from the network effect.  Each additional connection requires hardware and doesn't benefit from multiple connections. And it may not work out like they want, competition could kill it.

4. They have large customers - "Our top five customers, in the aggregate, represented approximately 64% of our total revenues during the year ended December 31, 2009. Our two largest customers, Sprint Nextel and AT&T, accounted for 23% and 14% respectively"
A merger would kill some of their business - there would be no need for an intermediary.

5. Price per minute margin will be pushed down with competition.
Personally, I view this as a temporary negative but a long term positive.  This in effect is their "moat" (low cost provider).  This is an area that is murky for me -- WARNING: This could be much greater than I know - the question is "How much competitive pressure can be applied" - from what I can tell, some (lowering margins) but the competitor would feel worse effects and has to pay for deploying their network with debt, as described before.

6.  As a telecom provider they are regulated by state, local, and federal authorities.
This I'll take in two parts, and that IS important. Federal - they are "working with" the fed on the new legislation.  (They are viewed as neutral, and the fed worries about the big guys more) So far everything they supported has gone through as far as I know.
State/local - this is actually a huge benefit as far as I can tell as it's a "semi-moat" -- competitors will have to jump through every hoop that TNDM has already gone through to get the local OK to operate. As an example, they have to get everything legally approved before they can work in a state or even sometimes a city, this area is highly regulated thus providing a barrier to entry for a new player.

7. Their market is 83% saturated.  This is a lot and the major markets are covered.
Don't assume that their is only 17% growth left -- this would be a misunderstanding of the geometrical growth of node connections.  For a quick reference, use your computers scientific calculator (use the view menu then scientific) and press a number greater than 2 then the ( n! ) button.  Then try the next number, you'll get the picture quickly. This would approximate possible connections between phone numbers.
Plus general cell use is up every year, as is the amount of cell users that use the cell exclusively (no land lines) - in addition TNDM connects ALL phones that connect to cells including VoIP.

Positives: (the fun part)

1. This company is a Cash Cow,  they have 5.62 a share in cash.  They make tons of cash.  They pay for their growth in cash.  They buy back their stock with cash.  If you take out the cash (the PPS at 13.44) basically the stock costs us about 8 bucks with earnings of 1.20 a share. An effective P/E of 6.66 (sorry, I just couldn't round such a devilishly good number) and earnings yield of 15%.  This company grew (before extra expenses for the new Ethernet exchange) at close to 17%. (per Yahoo PEG of .56, cash adjusted its under .40)
P.S. Did I mention the cash?

2.  They have the first mover advantage in the tandem exchange business.  They have taken the market by storm in a few years (technically, they are the market) after reading about it, I was worried they were about to become a de facto monopoly and all the congressional problems that it entails.  They have good relationships with their customers (Sprint just signed a 1+year deal on prices) and TNDM gives them what they want at a good price

3.  They are priced as if there is negative growth - there is still plenty left in the phone business and the new business of Ethernet Exchange is expected to be a (this is NOT a typo) a 40 Billion dollar market.  To give perspective, revenue now is less than 200 Million. This is an untapped and untested market that requires skill and expertise that they have, locations they have, and technology they have (technically they bought, the brand new Cisco ASR 9000, if you remember the hype on this one a little while ago.  Cisco said it would revolutionize telecom, this is what they were talking about. (see reference link later).  I have a feeling this is part of the "branding" I spoke of earlier.

4.  They can price out the competition on the telecom side.

5.  They have the team in place to do the job, they are proven, and this is a highly profitable business.  You get the older business growth for free and the new growth in Ethernet exchange as a bonus.

6.  They are branching out.  British Telecom (BT) came to them to ask their help in penetrating the oversea business.  This a largely untapped market and may soon be a source of growth. 

7.  BT has a unrelated wholesale division (a neutral provider to Euro telcos) in their market.  ValueAct recently bought a 6.2% stake in the company.  They seem to specialize in turnarounds, buyouts, and mergers. Avg purchase over $15 per share.   Before the rumors get started -.there is a poison pill against hostile (but maybe not friendly?) takeovers. (But it got me thinking of course!)

Why is the stock so cheap?

I believe that it fell off the growth/momentum investors radar, it's technically an "orphan" -- the "growth rate" fell and everyone jumped ship at once coupled with bad news about the patent and competition.  I may be rationalizing to myself but it seems way overblown.  I think this is a great opportunity to get in on a "growth for free" scenario with little downside.  As with all value investing, you will have to be patient just to find out if the new business even takes off, but even without this, I believe there is little if any intrinsic downside.  I can't properly value this company but I use the Munger/Buffett fat man theory here, it's a good deal as I see it but I couldn't quantify it.  Do your own research, check the numbers, don't use the rent.  I am new at this and as I said "I could be very wrong here".

Disclosure:  I'm in TNDM at 16.26.  This is a long term hold for me.

Further info:

Flywheel effect of TNDM

http://www.youtube.com/watch?v=5vJbzwsKiBw

Neutral Tandem site - About us
Check out the video and primer on "Understanding Tandem Networks"

http://www.neutraltandem.com/aboutUs/index.htm

New Cisco router

http://blog.tmcnet.com/blog/tom-keating/cisco/cisco-asr-9000-high-end-router-launches.asp

1st Ethernet customer I found - RCN links to multiple Ethernet exchanges

http://connectedplanetonline.com/IP-NGN/news/rcn-ethernet-exchanges-052710/

Thanks for getting this far, KJM

This company came to my attention while I was screening for certain aspects. Upon calling the company and asking some questions  . And understanding what the commoditiy business was. And running the numbers . It looked and sounded great to me. But I passed on it for one reason. Its past is limited and its future is limited . As you stated it is a consumer commodity and is subject to unforseeable change. So I passed.

It is a good idea and look interesting. But its future bothered me. Maybe I just felt uncomfortable with its niche. The niche is unstable. I think.

The numbers look good. And there is something at work here that I did like.
I also dont really understand the company I am sorry to say.
Even after I read what you so nicely put down. I have to admit to myself this is out of my field of comprehension.

From previous news the company has partnered with Telx.  http://www.telx.com/   Telx has already filed the preliminary paperwork for their IPO (They are heavily partnered (same insiders) with the REIT Digital Realty Trust (DLR - way overpriced in my view), paperwork for the IPO can be found on their site).  They have partnered with NT to start a service that rivals all other competitors and will provide a network that covers the entire country.  There is little information on the deal, which I would expect by the next Q. There have been a few things added to the NT site without press release or fanfare. To my knowledge this has been on the their site for a very short time as I check it regularly and hadn't seen it before.


Neutral Tandem quietly added these three services to their website.  As I knew of the other two, the last one was the most interesting.  This is touted as a private business cloud service.  This company that they have partnered with Movius http://www.moviuscorp.com/ does APPS for the web - combined with NT's new product this likely looks to be a "cloud" service for apps.  I have read white paper et al, from Cisco, Telx, and others involved that this isn't just for phone apps - this is a fully private cloud service that would be compatible with needs such as business to business connections for applications such as - and this was a surprise - "High Frequency Trading".  From my understanding, banks and brokerages are one of the first target for the service. The first and third service are easily combined - the first as more of a simple point to point connection and adding the "hosted services" - this would add a layer between the point to host a variety of applications - this will be a "value" added service setting them apart.  This is a simple advantage for all IT spending as they could add a program at NT's hosting center for the businesses entire network, the ease of implementation will be a major draw - consider this a "Smart Web".  As I've mentioned this is a nascent industry - there are no "rules" yet.  It is a wide open space for anyone who wants to take it,  I think the NT and Telx partnership looks to be a good first step. 

I think with this "addition" to the web site we have at least some of the answers to the new business model for the Ethernet eXchange side of the business.  They are starting their own model and  (with my limited knowledge) was better than I had hoped for - they have become a SaaS (Software as a Service) provider with a unique and needed model.



http://www.neutraltandem.com/prodServices/ethernet-exchange.htm

Ethernet eXchange

Neutral Tandem is revolutionizing the way Ethernet service providers interconnect with one another
Up until now, Ethernet service providers have engaged in complex, one-off interconnects with multiple carriers in an effort to provide seamless service to their customers. Neutral Tandem is changing all that with its new Ethernet eXchange service. The Ethernet eXchange acts as a nexus for the Ethernet community by enabling providers to interconnect with one another in a more efficient, simplified manner to accelerate revenue. Neutral Tandem’s Ethernet eXchange platform combines next generation technology with hundreds of existing interconnections to provide Ethernet service providers with a streamlined means to pass traffic between one another in several neutral interexchange points across the country.
Ethernet eXchange diagram
Why Neutral Tandem?

    * Strong track record with interconnecting carriers
          o Neutral Tandem currently excels at enabling over 100 carriers to efficiently interconnect
    * Provides a neutral meeting place for Ethernet service providers to interconnect
          o Buyers can compare multiple suppliers and service levels and reduce operating costs
          o Sellers can advertise their building list to members of the eXchange network to drive revenue
    * Neutral Tandem’s scale and footprint includes 14 Ethernet eXchange locations planned by YE 2010
          o Dozens of service providers are already interconnected to Neutral Tandem
    * Neutral Tandem’s all-IP national backbone network enables service providers to discover Ethernet services in markets outside their footprint
          o Enables access providers to advertise their market reach to all service providers across Neutral Tandem’s network
    * Streamlines interoperability with a wide range of Ethernet service providers
          o Accelerates revenue streams by cutting provisioning intervals to deliver service
          o Reduces the complexity tied to mapping different CoS between disparate networks

--------------------------------------------------------------------------------------------------------


http://www.neutraltandem.com/prodServices/commonpoint.htm

CommonPointSM

Neutral Tandem is changing the dynamics for how traffic is routed to the U.S.

Most international carriers and Mobile Network Operators find the U.S. numbering plan confusing and are often frustrated by their inability to better manage their traffic stream to the U.S. Neutral Tandem can help carriers that share these concerns and are looking for an improved, cohesive solution for U.S.-bound traffic.

Neutral Tandem has created a new and comprehensive solution for management of traffic destined for the U.S. with CommonPoint. More than a termination option, CommonPoint is a complete, integrated service specifically designed to simplify the complex U.S. numbering scheme. Through the use of comprehensive one-on-one consultation, Neutral Tandem can help carriers understand how CommonPoint can complement, rather than replace, its existing valued relationships. With customized reports and features like roaming enablement and CLI delivery, CommonPoint will closely align with a carrier’s specific business objectives.


CommonPoint is ideally suited for international carriers, MNOs and other service providers alike, helping to:

    * Reduce Costs
      - Gain access to the most extensive and cost-effective U.S. tandem network
    * Improve Call Quality
      - Direct connectivity and number portability correction will improve a carrier’s call completion
         percentages up to ten percent
    * Optimize Traffic Management
      - Through a practical understanding of the U.S. numbering plan, as it pertains to a carrier’s traffic
    * Create New Revenue Streams
      - With integrated routing and risk management tools

-----------------------------------------------------------------------------------------------------------

http://www.neutraltandem.com/prodServices/hosted-services.htm

Hosted Services

A New Way of Delivering Applications and Services …

Neutral Tandem’s hosted services offers a fresh approach to replace the traditional infrastructure-based delivery of bringing new applications to market while reducing risks and shrinking lengthy development windows. Neutral Tandem is uniquely positioned to offer customers and technology partners the ability to deliver centrally-hosted services to over 75% of the U.S. population in over 145 markets across the country, while enabling carriers to focus on their customers.
Hosted Services diagram


Why Neutral Tandem?

    * Neutral Tandem’s unique validation success model enables carriers to quickly conduct trials and launch new services while minimizing the risks and investments traditionally associated with product development.
    * Applications are hosted in Neutral Tandem’s data center and can then be routed to Neutral Tandem’s next generation, national IP network to reach millions of customers across the country. One example of this combines Neutral Tandem’s hosted services platform, network and customer reach with Movius’ leadership in the development and delivery of messaging and collaboration solutions to service providers worldwide.
    * A range of flexible business models are available which range from fully hosted, licensed to buy, and hybrid licensed and hosted.

I found an numbers analysis of TNDM done April 1, 2010. - permission to repost was granted

It has all the numbers in one place along with a multitude of different valuations.

http://www.betapeg.com/yahoo_site_admin/assets/docs/TNDM.93183401.pdf

Peerless Network Closes Additional Funding Round

http://www.tradingmarkets.com/news/press-release/tndm_peerless-network-closes-additional-funding-round-1068627.html


This is an interesting article.  One you need to "Read between the lines".  I found a lot of positives for TNDM here. You have to read it closely -- for all that don't know Peerless's CEO is a chronic over-hyper, as far as I can tell, by his previous statements.

News from their site.

http://www.peerlessnetwork.com/news.html

-------------------------

Dissecting this short statement I found these major points, they are quite telling and as far as I see - they've never mentioned these points before: (this is a private company with very little info out - I'm using psychology cutting through the spin and maybe even a little "CEO ESP", ha ha)

"Peerless Network, Inc. has closed a new round of equity financing. Combined with new credit lines available to the company, the total new capital available to the company is approximately $14 million."

On all previous news they end with the corporate blurb that they are a fully funded company up to March 2010.  I think they are in trouble.  Using 10% of TNDM's number for OPEX and CAPEX, this will last them for apx one year without any debt servicing (I don't know if they have any, but I'm guessing yes but not factoring it).

-----------------------------------

""The recent progress in the litigation with Neutral Tandem, Inc. was also a key factor in achieving a substantial increase in valuation relative to past equity raises."

As I mentioned previously,  the lawsuit didn't seem to have much merit and I wasn't sure why they did it - I guess now we know.  They had trouble raising capital to expand and compete.

-----------------------------------

"Traffic growth in July will increase by approximately 20% compared with June, which itself was a record month. To show our thanks to our customers, Peerless Network is offering a Customer Appreciation Promotion to provide our national customers additional incentives to ramp services quickly in our new markets."

This has two important parts -

1. Traffic growth (obviously not profit) is up 20% compared to June -- They are touting a single month to month growth number???  In comparison TNDM's growth for the 1st Q was 25.7% growth Q over Q  -- Peerless is small enough to say this with very little change, very misleading and hyped in my opinion.

2. Customer Appreciation Promotion - They are cutting prices and have little revenue.  They are hoping a price cut will cause the large customers to "ramp up" - in other words customer spending has stalled.

------------------------------

All of this together says to me "We have all the usual problems companies have when fighting a low cost producer" and our own customers don't trust us to do the job.

All of this is conjecture at this point - I am interpreting heavily (or guessing as some would call it, lol).  Peerless is a private company (with apx 10% of the market and CENX 10% - TNDM 80%) and the only numbers I can find come from their press releases and industry sites on market size.

Overall, what I gather, is that they are in trouble, need cash (that they said would be self funding), had trouble getting cash in the past stunting growth, and now are cutting prices for "existing" customers - all while putting a great spin on it.

I found this new article by Cale Smith from Islamorada Investment Management (he wrote the original SeekingAlpha article that got me interested) which has a link to a .pdf file from a guy who did a write up on VIC. The article was from 7-12-10, it isn't accessible on VIC yet unless your a full member.

The VIC writeup has the numbers broken down if you want to see them - and more analysis + catalysts

Oops, forgot the link, sorry

http://www.caleinthekeys.com/2010/07/more-on-neutral-tandem/

Kevin,

I think there may be some real value in TNDM.  I own some (7.5% of my portfolio).  After watching the last two quarters miss expectations I am beginning to think TNDM may have a dieing business model.  The trend in earnings has been down.  They had more traffic this quarter and still missed.  The ethernet business is the only option that will allow TNDM to resume growth.  I like established value.  This is turning into a utility type company that may have a chance of hitting a home run.  I'm not sure I want to invest in this type of utility.  I'm going to listen to the conference call but unless I like what I here I may be out of this one at a substantial loss.

"I'm going to listen to the conference call but unless I like what I here I may be out of this one at a substantial loss." "dieing business model"

I'm going to listen this weekend - gotta work today and tomorrow.

As strange as this may sound, I looked over the Q and I really liked the numbers.

Revenue was supposed to be taking a major hit, not costs rising.

The costs are directly related to the new business investment.  Check out the liabilities - direct cost related to the regular business has gone down.  It's basically maintenance CAPEX/OPEX  (lower) vs investment CAPEX/OPEX (big increase) that's causing the hit to earnings.  (which doesn't bother me at all, though the street hates it). They haven't dipped into cash to finance the new network buildup (competitors are using debt, TNDM is taking it from earnings), have increased cash, and bought back shares (about 2% in 2 Q's).  I can't complain much about that, it is actually what I prefer to see.

I don't recomend making decisions on what I say, remember this was my first analysis .  I have only an idea of how the EE exchange will work through my readings (I have a few nice thoughts, though).  They just put out a press release.

http://ir.neutraltandem.com/releasedetail.cfm?ReleaseID=493925

"Neutral Tandem also announced today that it is ready to begin accepting orders in the following six Ethernet eXchange markets: Atlanta, Boston, Chicago, Dallas, Los Angeles and New York. The company continues to plan to deploy its Ethernet eXchange switch fabric -- the Cisco ASR 9000 -- in eight additional markets prior to year end."

A highlight (or lowlight depending on how you view it) -- 6 are in with associated CAPEX/OPEX -- the other 8 with associated increased CAPEX (assuming steady OPEX) will be another hit to earnings over the next 2 Q's. (Price: It's expected to go for around $80,000/per ASR 9000 . With many per location scaled by need - to give some perspective they can do about 200 movies or 250K mp3's)

At present the stock is priced for imminent death, something I don't think will happen (is it obvious, lol).  Though any lower and it becomes a net net (at 11 it's over half cash).  I think it may be time the bring out the Mark Twain quotes.

I normally wouldn't write an update for a Q earnings release but with the confusion (especially my own) I figured I'd try to explain what I got out of it.  There is mass confusion everywhere I look on this company (apparently even among the analysts calling on the CC).  I don't have all the answers and am just doing an "educated guess" as to what is going on.  As always my nice, brief post.

Second Q 2010 earnings call and Q release -- news and notes

Total current assets 217,784  - Total  liabilities 13,656 = 204.13 vs a market cap of  353.51M 

353.51 - 204.13 = 149.38  - restricted cash 907k = 148.47 the cost of the company to the shareholder after cash and real equivalents  ///  # Shares 33.04M

148.47M / 33.04M = 4.49 a share for the business that is projected to make over $1.00 this year -- the effective P/E is 4.5

From the 2010 June-10Q

For the three months ended June 30, 2010, we increased revenue to $44.8 million, an increase of 8.5% compared to the three months
ended June 30, 2009. The increase in revenue was primarily due to an increase in minutes of use to 25.9 billion minutes processed in the three
months ended June 30, 2010 from 21.3 billion minutes processed in the three months ended June 30, 2009, an increase of 21.5%. Our income
from operations for the three months ended June 30, 2010 was $13.2 million compared to $16.6 million for the three month ended June 30,
2009. Net income for the three months ended June 30, 2010, was approximately $8.5 million compared to net income of $10.7 million for the
three months ended June 30, 2009.

For the six months ended June 30, 2010, we increased revenue to $89.6 million, an increase of 12.7% compared to the six months ended
June 30, 2009. The increase in revenue was primarily due to an increase in minutes of use to 50.7 billion minutes processed in the six months
ended June 30, 2010 from 41.0 billion minutes processed in the six months ended June 30, 2009, an increase of 23.5%. Our income from
operations for the six months ended June 30, 2010 was $27.3 million compared to $30.5 million for the six months ended June 30, 2009. Net
income for the six months ended June 30, 2010 was approximately $17.0 million compared to net income of $19.7 million for the six months
ended June 30, 2009.

My very rough estimation on core transit business (obvious small sample size problem - this can be done with 6 month or TTM numbers which would produce a better number)

I do this to view it as two businesses - one the core transit and the other (actually two - Ethernet Ex and international transit) as the startups that are using cash and not producing revs yet

Revenue for TNDM = Minutes x rate per minute
Revenue / Minutes = rate per minute
$44.8 M/25.9 billion = .00173 present rate as of June 30, 2010
$41.2M/21.3 billion =  .00193    rate as of  June 30, 2009

This is apx a 10% drop in rate -- per the VIC writeup - costs have fallen faster (reference the VIC writeup to see this, he explains it better than I can)
I will assume no costs % falling (or an effective margin increase)  - income from ops would rise directly with revenue -- 2009 income from ops 16.6 x 1.085 = 18M core business income from ops
Profits would be the same calc 10.7M x 1.085 = 11.6M

The reported profit was 8.5M a difference of 3.1M factored with the taxes that would have been charged (assume 1/3) = ~2M - this can be attributed to the cost of the new business, litigation, and any assumption of a positive margin difference (which is likely, my best guess would be around 2M)

In my opinion this is great news -- the core business is profitable and growing, albeit at a slower rate. As a caveat, I expect this to continue for at least 2 Q's.  The net profit numbers should be flat until next year, a product of the build up of new business. (Though the company will do just fine - but who ever said the market is always efficient)

-- there is a simple (and when extrapolated very complex) mathematical reason for this, similar to the law of diminishing return- they add the same amount of markets each Q - to keep the growth rate the same they would need to add more markets each Q if everything was linear.  Example - They have 50 sites and add 10 = an increase of 20%  -- if they have 100 and add 10 = it's a 10% increase by percent but the same in respect to actual dollars (or yield on original costs if you prefer).   

The difference seen in actual revenue growth from previous numbers takes into account the geometric growth of traffic between networks ---  the geometric growth slows as you add smaller performing markets (but still increases much more than just a linear growth).

When you calculate profit growth you are using a multi equilibrium equation pitting multiple variables and their derivatives (and second derivatives) against each other (the complex part) -- growth rate of adding markets x geometrical growth rate of the connections between markets x rate change for minutes (a fraction as the rate decreases) x inherent growth of users in a market x the geometrical growth caused by inherent users -- all divided by the same for the last time period used.  P.S. if there are any math whizzes on here please explain to me what I just wrote - I think my head hurts and I'm sure I missed a variable or 3. Sorry to make it sound so complicated but I'm a math and science guy not the "writer type".(pardon the inverse pun, of course)

The short and sweet version -- if minutes increase faster than -- {the rate of cost per minutes falling / rate of costs of selling them falling} you make more profit -- this is what is happening here with the core business and not factoring the expansion or limited events like the cost for the lawsuit.   

They are paying for expansion into ethernet and international transit (also an expansion into new business) and still are profitable -- the unrealized profit (which we see as net income falling) is reinvested and will increase future returns. 

----------------

General notes from the 10Q

-- Personnel-related costs are the most
significant component as we grew to 152 employees at June 30, 2010 from 142 employees at June 30, 2009.

-- We do not defer any costs associated with the start-up of new
switch locations and we do not capitalize any costs. The start-up of an additional switch location can take between three months to six months.
During this time we typically incur facility rent, utilities, payroll and related benefit costs along with initial non-recurring circuit installation
costs. Revenues generally follow sometime after the sixth month.



-- General and administrative for 2010 Q2 and 2009 Q2 6,660 3,704  for 2010 first 6 months  and 2009 first 6 months  13,060 7,093
This was an unusually large increase due to multiple factors like the lawsuit fees, hiring, and consultant fees (most likely associated with the EE and international business)
Surprisingly to me, the network expenses have only increased as much as last period (6 month) - I assumed with the build out, this would be significantly higher
General and Administrative Expense. General and administrative expense increased to $6.7 million in the three months ended June 30,
2010, or 14.9% of revenue, compared with $3.7 million in the three months ended June 30, 2009, or 9.0% of revenue. The increase in our
general and administrative expense is primarily due to an increase of $1.4 million in non-cash compensation and $1.4 million in professional
fees.

-- Net cash flows from operating activities for 2010 first 6 months $ 29,254 and 2009 first 6 months  $ 26,275
Numbers are as expected up 11.5%

On the share repurchase - I went over the numbers -- with the repurchase so far they have equaled the number issued - basically a wash on share count over the last year but on the plus side for cash as they bought them back cheaper.

-----------------

General notes from the conference call (CEO and CFO were 25% of the call the rest was analyst Q's)

-- Deals have been signed with new customers are should show in the next Q
-- Earnings will be the lower end of estimates
-- They are lowering prices to retain customers and shut out competition
-- 9 new markets - 155 total -- 173 by the end of the year or 9 and 9 per Q
-- Hiring has been done to sell international markets - they have started business with 2 international customers (Asia and New Zealand)
-- on EE they will have their own customer portal
-- The charter customers are a test to develop the final product

Q and A (analysts - Morgan Stanley, Robert W. Baird, Avondale Partners, Raymond James, Faye Holland, Stevens, William Blair, Oppenheimer, CWS Financial)

-- What will cash hoard be used for? - In EE there are opportunities for organic growth and acquisitions, In international - partnerships, called share buyback so far "minor", In tandem connections they are already doing it
-- They expect growth from new deals already signed for July - expect growth in minutes for Q3 and 4
-- On competition - they want to let competition know they will aggressively keep business (I assume through lower price - to freeze out competition) -- "competition has slowed" -- 2 reasons given - competitors are looking elsewhere or TNDM has kept customers - "they've already addressed the situation" "taken care of most majors but not all yet" "we have not had any major market share loss" and don't expect any.
Growth in minutes Q over Q is increasing  - competition has affected margins - they also need additional equipment and capacity installed to handle growth, slowing implementation and contracts thus revenue growth.
--  No revenue in guidance is from EE - they are just figuring out from their customers, what the customer needs - it is up and running in 6 markets and they can start taking orders today - they may see revs this year but can't predict anything yet

Minutes breakdown - cable 8%, wireless 48%

-- Overseas - small rev so far (from new customer) revs expected next year -- testing phase with Acient (Asia Pacific - but China telecom traffic) Important - it is a direct connect with Asia Pacific region on a high quality IP pipeline, as opposed to a multi hop, inefficient multi network type

-- on pricing it is presently .00177 for the first half it will go down to .001615  total down 4% over the next 2 Q's and apx an 8% total drop for the year on prices.  The price drops in most cases are to lock in customers to longer term deals (some have no choice as TNDM has no competition in some markets)

-- on direct connection competition - this competition was a past problem and is already done for the most part (it would have been done already if they were going to do it) - the most aggressive in this area is cable but it's a small factor

-- Telx deal - TNDM is doing the network including operations, system, and management. (Telx came to them) - Telx deploys the hardware TNDM does the rest. TNDM's service is to connect a network of networks for the entire country - much like connecting phone companies with each other. Many like Telx have had trouble deploying their networks outside of their home area. (Very good news, they need a middle man to run the network of networks)

-- CAPEX for the rest of the year - EE more likely lighter than heavier of the total, more of the cost is on "Information systems" (network software, ordering,  and portal)
The EE is "CAPEX light" similar to the tandem business. Costs are highest at the beginning - it will be incremental after with increases in business

-- On diversification of business - they are less dependent on wireless as a large customer, which is growing but not as fast as other areas (termination traffic has increased the most)

-- Future revenue reporting -- EE will have it's own category -- International will report under traditional business

-- VoIP - 2 types - Internet - not a big concern // Private Network - no one has the infrastructure in place - it would take time (and money) to build

Overall, I'm pretty happy with everything I heard and read and Mr. Market can "Póg ma thoin"