Portfolio manager Cale Smith on investing, Spoke Funds®, and Islamorada in the Florida Keys.

Sexy, ain’t it? Yes, that TNDM idea may end up being the best thing about those years spent wandering the telco wilderness…

Thanks for the comments. And great blog! Just gave you a permanent link, and liked the KHD write-up, too. Should I call you, uh, Above…?

On TNDM – here are my initial responses to your questions above, but I can elaborate more as needed in another few days. In the cave a bit here. You may also find partial answers in the comments section of my interview on Seeking Alpha. Touched on the some of the same things tangentially there. You can find those here:

http://seekingalpha.com/article/190829/comments

In terms of additional resources, to better understand the business in general (exclusive of the company’s own filings and calls), I’d recommend both ValueInvestorsClub.com and the Motley Fool’s Hidden Gem message boards, actually. On the institutional side, I’d recommend the work done by analysts at Baird and Wedbush. Both tandem interconnect and Ethernet exchange markets are too young to have any industry and trade pubs yet. In terms of more specific competitive analysis, might take a bit more heavy lifting, depending on your comfort zone in telecom, but understanding network effects is obviously key, and you can get a few more insights from competitors websites (CENX and Peerless Network in particular) too.

And while network effects are the most powerful advantage, the company is also the low cost provider of tandem switching services – and will be of Ethernet exchange services, too. By low cost provider here I don’t mean currently “charging the lowest prices” however – I mean literally their cost structure is lower than anyone else’s because they own a backbone network, which none of their competitors do. So no matter how low their competitors attempt to drop prices to gain customers, TNDM can respond easily with lower prices and – this is the key – their margins will still be better.

First TNDM connected only local traffic among carriers. Then they built out a national IP backbone network connecting all major local markets. So now they can switch and carry long distance traffic between markets. The “network effects”-relevant part is that with every new customer that signs up – even just tapping into the network at a single point – the number of minutes that can be switched by the network increases, too.

Big picture…it’s the difference between owning just a roundabout that cars circle around in, and owning the roundabout plus all the roads that connect all the roundabouts. You can guarantee you’ll be able to keep all the roads clear that way, and you can spread the costs of maintenance out over a much bigger area, so your economics are better. It may take a snowstorm on another set of cheaper roundabouts to make the point clear to every driver, but eventually they’re going to choose the connected roundabouts.

On the consolidation question re: competitors…don’t appear to be any competitors that have similar business models and/or would move the needle in the industry even if they did team up. Competitors have a real chicken and egg problem…CLECs wouldn’t switch until another network is of the size as TNDM’s, yet TNDM is already in all the major markets, so competitors can’t get their networks to the same size to entice CLECs to switch en masse. So, small probability of being a risk.

On consolidation re: customers like those in Big Telco…well, let’s take the rumors last fall of a T-Mobile and Sprint tie up. While I should know better than to be surprised by irrationality in telecom, a rational person would say they’re just not likely to merge. Leaving aside their financials, the firms use incompatible technologies and the regulatory hurdles are quite high, as they would be for any of the majors these days. The impact of such a merger on TNDM would be minor in any case, as in about 5% of revenues, and that would be over two to three years. (Baird’s analyst estimates). Investors reacted last fall as if a merger would somehow magically fuse the company’s fiber strands together. The networks might be owned by one combined company, but they’ll still only go thru the bother of directing connecting at those nodes where it makes the most economic sense. So do mergers represent a potential risk for TNDM? Yes. It is a risk I lose sleep over? No.

On the risk of an all IP switching network, and by extension VOIP…overblown. Before the Ethernet exchange announcement, IP switching was a threat in the theoretical sense of the word to a business that was just in the tandem interconnect space. So there’s no getting around the fact that you should get comfortable with that to own shares for years and years. Or not. But it’s not an immediate threat, nor will it sneak up on anyone, management included, IMHO. And there’s still a big difference between IP switching and an all IP network. That aside, the push into Ethernet does confirm (to me) that management is well ahead of things here.

Not that it’s hard to be ahead there, mind you. The demographics of this country as well as the amounts of capital already invested in existing infrastructure mean that the rollout of all IP/adoption of VOIP will probably slow after the early adopters are onboard – and that’s still a very low relative base of users. And Big Telco isn’t going to let VOIP eat their wireless business away, either (see AT&T and Google Voice conflict on iPhone).

People have been talking about an all IP infrastructure for at least twenty years. Thru the Ethernet exchange, TNDM can now address one of the most attractive slices of that market. For the vast majority of applications, though, I suspect the IP switching threat and VOIP will remain just that…a threat, not a reality…for a long time still.

Hope that helps. Fire away with more questions as needed. Just may take a few days to get back to you this week…

Thx again!