Neutral Tandem: Switching gears
Oh, what a tangled web we weave, all thanks to the mass of mobile connections. Cell phones have become the standard, not the exception. Blue Tooth and myriad other earpieces have virtually become fashion accessories. Internet phone services, or VoIP, are booming as consumers piggyback phone connections onto the ubiquitous Web.
It’s no wonder that Neutral Tandem, Inc. (Nasdaq:TNDM), a provider of interconnectivity among telephone carriers, is optimistic that it can continue to detangle the communication web and fuel rapid growth even through an economic downturn, as CEO Rian Wren said on the Aug. 5 conference call to discuss second-quarter earnings that beat Street estimates.
The Chicago-based company, which announced in June that it has passed the 100 billion minute mark on voice calls, logged 14.2 billion billed minutes in the second quarter ended June 30, an increase of 45% from the year-ago period. The company added 11 new markets in the quarter, putting it into 82 markets with 539 million assigned telephone numbers.
By the end of this year, Neutral Tandem plans to be in 12 more markets, bringing the coverage up to 556 million assigned numbers.
The rapid growth is reflected in earnings. Net income in the second quarter shot up to $0.17 per share, compared with $0.03 in the 2007 quarter and analysts’ estimates of $0.13. Adjusted EBITDA rose 81% in the period to $12 million. Revenue was up nearly 40% to $28.6 million in the quarter.
The company revised its guidance for the full year upward: revenue is now expected to reach between $117 million to $121 million, instead of $112 million to $116 million, while adjusted EBITDA is now expected to range from $47 million to $49 million, instead of from $39 million to $41 million.
Even before the second-quarter report, Avondale Partners analyst John Bright put out a comment June 26 recommending purchases of Neutral Tandem stock in the wake of a decline in the stock price, which Bright attributed to a negative interpretation of the announcement about reaching 100 billion minutes.
The stock fell from above $20 in May to its 52-week low of $15.89 on June 30. It has since recovered to near the $20 level. The 52-week high was $23 in February. Avondale’s price target (before the second-quarter earnings report) was $26. The mean target among six brokers providing targets is $23. The stock currently has five “buy” ratings, including three “strong buys” and three “holds.”
Avondale revised its second-quarter estimates upward in the June comment, to $0.14 per share from $0.13, still short of the actual $0.17 reported last week. For the full year, Avondale raised its estimate to $0.57 per share from $0.54. Anticipating the new guidance from the company, Avondale raised its revenue estimate for the full year 2008 to $117.6 million from $114 million, and for 2009 to $146.9 million from $145.9 million.
Neutral Tandem offers a facility for tandem switching — connecting on what used to be called “trunk” exchanges, those not terminating with the retail user — that are independent of the so-called incumbent local exchanges, or the Baby Bells still surviving from the break-up of the old AT&T. Reliance on the ILECs means phone companies have to pay their competitors to connect calls and enable them to reach their destination. Neutral Tandem provides a genuinely neutral facility for that exchange, on a system that bypasses, rather than duplicates, the ILEC system. Thus, the exchange can be quicker, cheaper and independent from competitors.
Neutral Tandem has focused on wireless networks and currently serves eight of the 10 top wireless carriers, including Sprint and T-Mobile, that provide services for 95% of wireless users.
The company, founded in 2003, went public last November, raising $90 million at $14 a share. Avondale’s Bright sees growth potential at several levels — as the market for wireless traffic grows, especially as carriers switch to flat-rate plans; as Neutral Tandem expands its network, especially if it gets Verizon Wireless, the top holdout so far, to sign on; and as the company increases its penetration, currently at 60%, in the markets it does serve.
There are also risks, of course. Consolidation in the industry, say a merger of Sprint and T-Mobile, would eliminate the need for tandem switching between Neutral Tandem’s two main customers and would adversely affect the stock. Also, Neutral Tandem is trading at a high multiple, currently 46.91, which means the fundamentals have not yet caught up with the expectations many investors have already pinned on the company.
Bright notes that regulation also plays a role. While Neutral Tandem can offer discount prices in the current regulatory environment and would do well in a deregulated environment, a move by regulators to force ILEC rates on tandem switching down, could force Neutral Tandem to lower its prices even further, reducing profit. But, Bright concludes, the regulatory impact is more likely to be favorable for TNDM.
Neutral Tandem closed at $19.59 on Friday, giving it a market cap of $625.
About the Author
Contributing author Darrell Delamaide is a freelance writer and editor based in Washington, D.C. He has specialized in business and finance over a long career, writing for Barron's, Dow Jones, Institutional Investor, and Bloomberg, among others.
Read More
(click a star)
Enter comment: