John Lewis' 3 Long Ideas at Value Investing Congress Las Vegas ~ market folly

Tuesday, April 8, 2014

John Lewis' 3 Long Ideas at Value Investing Congress Las Vegas

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.

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