A Blanket Reply on TNDM

I have gotten a slew of emails today about Neutral Tandem’s latest earnings report, as well as a few comments on my last TNDM post here. Apologies I don’t have the time to respond to everyone individually, but, in short, my thoughts on the company have not significantly changed. Its valuation may now be a touch lower, but it would seem uncertainty and risk are both less now, too.

Not sure what else I can say that I haven’t already said about the company. There was noise in adjusted EBITDA. Wren’s tone on the call today was, finally, positive. The company’s main competitor, Peerless, appears desperate. Any company trading at five times cash flow is worthy of your attention. This one, doubly so. I continue to be okay waiting and averaging down.

It hasn’t even been near a full year that we’ve owned Tandem shares in Tarpon. I’m looking at two Post-It notes that have been stuck to my screen for longer. Some time ago, back when men were men and before boys ran hedge funds, it used to take time to make money when investing. TNDM will probably be no exception. I believe the wait will be worth it.

Investors can view this market’s casino mentality as the curse of our age, or treat certain days as if they were made to be taken advantage of. I basically did the latter today. I bought a ton of new TNDM shares in Tarpon, and I unloaded a ton that were at a higher cost basis, too. Fortunately, I can do this pretty efficiently and at zero cost through my custodian. So though our position size is the same, Tarpon investors now own a bushel of TNDM shares priced at all-time lows.

I can only hope it happens again tomorrow.

Where’s a good sovereign debt crisis when you need one?

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Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
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3 Responses to A Blanket Reply on TNDM

  1. Ben Strubel says:

    Judging by some of the questions asked on the conference call it appears some of the analysts don’t have a good understanding of the companies business model and what it actually does. Honestly I have been intrigued by TNDM for awhile but it took me several months to understand the value proposition TNDM offered to customers and to fully understand some of the risks involved and make the investment.

    Also I am kind of curious about what the true value of TNDMs network is. They have $5 or so in cash per share. I wonder if the network is worth close to $5 a share. Even in a situation where telcos didn’t need TNDM and that business went *poof* the equipment and backbone network has to be worth something. The switching and network equipment is on the books for $67M but i suspect the value of all of it connected up together makes it worth more. I always sort of like looking at assets more than guessing at income…

    • Cale Cale says:

      Yes, good point, Ben. And I had that same impression…at least about one of the last analysts to ask a question that was basically along the lines of “why are you adding new customers?”. I should go find that and post that part of the transcript. Head-scratching indeed. It’s all about the AMPU…

    • Cale Cale says:

      Also, another link to a summary of take-aways from that call:


      Thought this part was worthy of attention in particular:

      “….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. “