Seeking Alpha
Profile| Send Message|
( followers)  
Tuesday morning Tucows (NASDAQ:TCX) reported record revenue and record adjusted net income for the second quarter. So why is the stock trading down more than 15%?

Looking more closely at the numbers, things were less encouraging. Revenues included $3 million from a one time sale of 2,500 domain names. Without this sale, earnings would have been essentially flat with year ago numbers. This quarter's revenue and earnings were weighed down by a decline in new domain name registrations due to m&a activity within their customer base as well as the loss of major customer Registerfly. Google ad revenues were also weaker.

Separately, Tucows announced a price reduction for wholesale domain registrations.

On the conference call, CEO Elliot Noss seemed to accentuate the negative, even for some of the positive aspects of the quarter. He stressed that the $3 million domain name sale was "atypical" and suggested that the overall level of domain name sales for the next two years might be less than this. He described the wholesale domain registration price reduction as "an expensive choice to make" and would not quantify a financial impact.

Here are the counterpoints:

The $3 million domain name sale which was described as "atypical" could be better described as "demonstrative" of the value of Tucows' extensive domain name portfolio. Tucows owns tens of thousands of domain names including the Netidentity portfolio of surname domain names. Tucows carries the entire surname portfolio on their balance sheet as a $12 million intangible asset. (This seems undervalued compared to some recently announced big ticket domain name sales.) The value of their premium and expired domain name portfolio is not reflected on their books at all, since there was no cost associated with acquiring the domain names. These portfolios together represent significant, latent, unrecognized value.

Second, the domain registration price reduction has been a long time coming. While the number of total domain registrations under Tucows management continues to grow, their market share has been dropping. Tucows has already been giving price reductions to some of their higher volume customers in order to stay competitive.

The number of actual registrations which will be impacted by the price reduction was not stated. The price reduction will help Tucows maintain and possibly increase their market share in the competitive domain name space. The revenue impact of the price decrease should be somewhat offset by the impending Verisign registry fee increase coming in October. The margin impact may also be offset by higher sales volumes as new registrants take advantage of the lower pricing.

Bottom line - this quarter's results were disappointing, but the stock price reaction is overdone.

Disclosure: I am long Tucows.

Source: Tucows's Results Disappointing, But Selloff Overdone