Fallen Angel: Tucows Inc.

The recent sharp turbulence in the stock market, due to the mortgage crisis, has unfairly punished many non-financial microcaps. Tech play Tucows Inc. (AMEX:TCX) is one such example.

Headquartered in Toronto, Tucows is primarily in the unglamorous, but profitable business of providing domain name registration and related Internet services to Web hosting companies and Internet service providers. Except for a one quarter hiccup in 2006, Tucows has posted 27 quarters in a row of positive cash flow from operations. In addition to managing over 8 million domain names and millions of email boxes for 9,000 service providers, Tucows owns a portfolio of 150,000 “high value” domain names. Tucows acquired the core of this domain name portfolio through its 2006 acquisition of NetIdentity for $18 million in cash and securities.

As part of this deal, NetIdentity shareholders, which included billionaire Mark Cuban, ended up with a minority ownership stake in Tucows. In mid-August, investment firm Lacuna, LLC bought out Cuban’s 6.9 million share position in Tucows for $0.50 a share.  Cuban had been a Tucows shareholder even before the NetIdentity deal. Interestingly, two of Lacuna’s principals were previously NetIdentity executives. While the recent exit of Cuban from Tucows has weighed on the stock, Lacuna’s deep knowledge of the domain name and Web services sector shouldn’t be ignored. After a series of follow-on open market buys by Lacuna, the investment shop now holds a nearly 15% ownership stake in $28 million market capitalization Tucows.

For the second quarter ended June 30, Tucows reported revenue of $20.5 million, down slightly from $20.8 million a year ago. Tucows noted that last year’s second quarter results included an “atypically large” sale of a block of domain names for $3 million.  With this in mind, net income declined to $2.2 million, or $0.03 a share, from $3.2 million, or $0.04 a share, a year ago. Deferred revenue increased 11% . . .

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