Neutral Tandem Inc. UNIVERSITY OF OREGON INVESTMENT GROUP RECOMMENDATION: HOLD. December 03, 2010

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1 UNIVERSITY OF OREGON INVESTMENT GROUP December 03, 2010 Technology Neutral Tandem Inc. RECOMMENDATION: HOLD Stock Data Price (52 weeks) $9.87 $14.79 Symbol/Exchange TNDM / NASDAQ Beta.95 Shares Outstanding (M) Average daily volume.537 (M) (3 month average) Current market cap (M) Current Price Dividend Dividend Yield N/A N/A Valuation (per share) DCF Analysis $22.71 Comparables Analysis Target Price Current Price $18.19 $20.45 $14.79 Summary Financials Revenue Net Income Operating Cash Flow 2009A (M) (M) (M) BUSINESS OVERVIEW Incorporated on April 2001, Neutral Tandem offers tandem interconnection services principally to wireless, wireline, cable and broadband telephony companies. Headquarters are located at One South Wacker, Suite 200, Chicago, Illinois, It uses tandem switches to direct and exchange data and voice traffic between clients. TNDMs service provides an alternative to direct connections and ILECs which are other avenues available for interconnecting networks. Interconnecting is when a network company needs to connect and or transfer data to another network Covering Analyst: Armando Perez Armando@uoergon.edu The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational. Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be. Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG s portfolio. In addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG s portfolio.

2 company. For example, If a phone carrier needs to connect its customer to a customer of another phone carrier, it would have to interconnect. Currently Neutral Tandem has a fully integrated IP network back bone that allows them to diversify in customer type. The IP interconnecting service is billed on a per minute basis. With the acquisition of Tinet, a global carrier that provides IP and Ethernet connectivity, they are becoming a lead player in interconnectivity not only domestically but globally. Currently the company has over 250 employees and operates in 167 domestic markets. SERVICES The essence of Neutral Tandems service is to allow competitive carriers to exchange local and long distance data and voice traffic thru their network. All clients are usually allowed to direct traffic to any other client on the network. The IP back bone network it is capable of automatically switching IP-originated or conventional TDM traffic to other carriers using either protocol. This means they can support IP-to-IP, IP-to-TDM, TDM-to-IP and TDM-to-TDM traffic. The ability to convert protocols allows for a wide customer base. Wired Telecommunications The origin of Neutral Tandem was founded on interconnection between wired carriers. Neutral Tandem is able to connect local and long distance voice calls between its clients and direct them to carriers that are not clients but are in network range. It charges a per minute fee for the interconnect. Currently this type of interconnection is declining due to a drop in wired phone usage. Wireless Telecommunications The rise in cell phones and other wireless voice devices has contributed to ILEC s switches, a substitute to Neutral Tandem services, becoming congested. Neutral Tandem has an advantage of providing a much demanded service to wireless customers who wish to offer superior coverage and quality to their own customers by providing an large and capable network. Most wireless carriers use TDM traffic which typically is charged a higher rate per minute due to its complexity of interconnecting. Cable/Broadband Neutral Tandems switches are able to interconnect cable and broadband. In recent years cable companies have been taking advantage of this service by interconnecting VoIP. This type of traffic (Voice over Internet Protocol) transmits phone calls over the internet in digital packages. Cable and internet companies started to compete with wired telecommunications through the use of this service. They are able to bundle services such as internet, cable and phone to charge a lower total fee. Ethernet Exchange Neutral Tandem's Ethernet exchange platform combines next generation technology with its existing interconnections to provide Ethernet service providers with a streamlined means to pass voice, data and video between one another. Ethernet providers could potentially interconnect with one another but this process because complex when connecting to multiple providers. Neutral Tandem's Ethernet service provides a unique advantage by enabling service providers to connect at one Ethernet exchange yet extend their reach into multiple markets by being connected to all other Ethernet providers on the network. Even with a variety of services, Neutral Tandem enhances its services by providing convenient and useful additions at no extra cost. The additions include: ongoing customer notification of new routing options that become available as 2

3 new customers are added to the network or the network is extended, customer invoices, management reports and call detail records in paper and electronic formats along with monthly savings summary reports. ACQUISITIONS On September 9, 2010 Neutral Tandem entered into a purchase agreement with Tinet, an Italy based corporation. Tinet engages in global IP interconnectivity and Ethernet exchange wholesale and provides these services to carriers worldwide. With this acquisition, the Neutral Tandem evolved from being a primarily U.S. voice interconnection company into being a global IP-based network services company focused on delivering global connectivity for voice, data and video. The purchase was finalized on October 1, 2010 and was fully financed by cash from their balance sheet. The cost of the acquisition was about 94.4 million which reflects certain purchase price adjustments: the consideration of 6.6 million that Tinet had in cash and 23.2 that it has in debt. The debt was paid in full at the time of purchases allowing Neutral Tandem to continue debt free. The acquisition expanded Neutral Tandem s 14 domestic Ethernet markets to 99 global exchanges. The expansion of the Ethernet network will have a large impact to current activity on its Ethernet exchange services. The more markets and clients Neutral Tandems network can reach, the more potential clients it stands to gain due to the opportunity of connecting to a large network were a client s market is greatly expanded. Ethernet is predicted to become the most common form of data transferring and with this acquisition; Neutral Tandem has positioned its self to take advantage of this growing market. The majority of Tinets revenue was being realized by its IP transit service, which is similar to Neutral Tandem s applied to a global scale. It has constructed an IP back bone that is ranked #7 globally for performance and market coverage. Tints IP back bone will allow for a simple integration process that will take little capital investment. After the acquisition Neutral Tandem will be able to offer international interconnection to its clients. The joining of both networks will also increase prospect customers by providing a much larger network that they can connect to. CUSTOMERS As mentioned previously, Neutral Tandem has a wide range of customer type that all relate to media services. Their primary customer base is wireless, wireline, cable and broadband telephony companies. All customers of Neutral Tandem have a need to interconnect to other carriers and or expand their market. Value is added to the services that Neutral Tandem provides by having more carriers connected on their network so that an individual customer has a larger amount of different carriers to interconnect with. Before the acquisition of Tinet, Neutral Tandem had over 100 carriers passing traffic through their networks and had over 116 carriers connected to their network. After acquiring Tinet, the customer count went above 700 in over 70 countries. Tinet s top ten customers represent 36% of their revenues. Neutral Tandem s two largest customers, Sprint Nextel and AT&T, accounted for 23% and 14%, respectively, of total revenues. The Tinet acquisition will help Neutral Tandem dis-concentrate some of their revenue. 3

4 Contracts Neutral Tandem contracts do not contain volume commitments, minimum payment, and can be terminated at any time. Even without the binding of a contract, Neutral tandem has been able to retain customers by delivering quality service at competitive rates. They have lost customer traffic (minutes used on network) but have not had any significant customers stop using the service completely. BUSINESS AND GROWTH STRATEGIES Neutral Tandems growth strategy is focused on expanding the share of telecommunications traffic that its network can serve. This will be accomplished by expanding and maintaing their IP infrastructure. Expanding the share of telecommunications traffic increases the value of their network to customers. Key elements of their expansion strategy include: New markets Currently Neutral Tandem is operating in over 167 markets, an increase of 30 since the beginning of the year. By expanding its market coverage it is able to provide its services to new carriers in the new markets and also transfer traffic into any carrier in the new markets. They plan to begin operating in six new markets by the end of the fourth quarter. Increase customer base With an expanded network that provides access to many markets, more customers should be intrigued to take advantage of Neutral Tandems services. Currently there are many regional wireless providers and cable companies that are not being serviced. Neutral Tandem plans to attract these potential customers with competitive rates. Increase Ethernet exchange Neutral Tandem is pushing to establish its self as a leading provider in Ethernet exchange service. Ethernet exchange is predicted to start growing quickly in the near future and Neutral Tandem wants to be ready for that growth. The new acquisition of Tinet who had over 75 global Ethernet exchanges shows the confidence that Neutral Tandem has in the growth of Ethernet exchange. Global Traffic Before the acquisition of Tinet, Neutral Tandem was exploring international calling and were already able to send traffic internationally. With the acquisition they will be able to not only send vocal traffic, but fully implement most of their services to a wide range of global customers. Global traffic is sure to increase due to their well-established domestic network connecting to the global network and being able to pass traffic anywhere between the joint networks. It is clear that Neutral Tandem is growing threw various means. They have recently had an acquisition and due to their historical practice of holding large amounts of cash, future acquisitions should be expected. Organic growth is also exercised threw expanding and improving their network infrastructure. 4

5 MANAGEMENT AND EMPLOYEE RELATIONS As of September 31, 2009, Neutral Tandem has 152 full time employees an increase of 5 since the beginning of the year. About 95 are located at the corporate office while the remaining employees are located throughout the country at switch locations. With Tinet employees included, Neutral Tandem will have over 250 employees by the end of the fourth quarter. Currently there is no labor union representing the employees. Management Personal The management team at Neutral Tandem has been a key part to the company s success. All have extensive industry experience and were all very knowledgeable in their third quarter conference call. Rian J. Wren joined Neutral Tandem in February 2006 as President, Chief Executive Officer and Director. Prior to joining he was Senior Vice President and General Manager of Telephony for Comcast Cable from November 1999 to August Mr. Wren has also held several senior management positions at AT&T's divisions for more than 20 years. He has plenty of experience and has guided the rapid growth strategy that has greatly expanded Neutral Tandem. Robert Junkroski has been with the company since its inception as the Chief Financial Officer and Executive Vice President. Before joining Neutral Tandem he was Vice President of Finance with Focal Communications Corporation and Controller for Brambles Equipment Services, Inc. Surendra Saboo has served as Chief Operating Officer and Executive Vice President since May He was the Vice President of Product Development and Operations for Voice Services at Comcast Corporation and served 14 years at AT&T. Currently the board of director has six members including the Chairman. No member of the board currently holds position in the company s operations. The Chairman of the board, James P. Hynes, is the co-founder of Neutral Tandem and has been active in the industry for over 30 years. PORTFOLIO HISTORY Svigals: UOIG purchased 175 shares of TNDM on 2/19/2010 at $15.82 per share for a total cost basis of 2, We hold this same position today. Tall Firs: UOIG purchased 1100 shares of TNDM on 2/24/2010 at $ per share for a total cost basis of 16, We hold this same position today. DADCO: UOIG purchased 300 shares of TNDM $15.62 per share for a total cost basis of 4, We hold this same position today. 5

6 RECENT NEWS 11/09/10 -- Neutral Tandem revised its 2010 forecast and expects revenue to be between $199-$201 million. This was higher than analyst s projections of 192 billion. The better than previous projections shot the stock price up to from 14.5 an increase of 12 percent. 10/09/10 The Company announced its agreement with Tinet to purchase all of its shares. It also stated that it would be fully financing the transaction with cash from its balance sheet. The acquisition would also expand Neutral Tandems network globally. This news immediately caused an upward trend in Neutral Tandems stock price that continued till about November 11 th. The acquisition also showed why the company had been keeping so much cash on their balance sheet. 06/12/08 Neutral Tandem commenced patent infringement litigation against Peerless Networks, LLC. As a counterclaim, Peerless alleges the patent is invalid and unenforceable and that Neutral Tandem violates various monopoly laws. Though the litigation is still ongoing, some claims against Neutral Tandem have been dismissed. INDUSTRY Neutral Tandem s services are not focused on one industry. They participate and are affected by the wired telecommunication, wireless telecommunication and Voice over Internet Protocol (VoIP) industries. To fully examine Neutral Tandem business environment all three industries need to be analyzed. Wired Telecommunications Companies in this industry provide direct communication services, such as local, long distance and international calls, using wireline telecommunications network which includes landlines, microwaves and satellite linkups. Currently this industry is declining, with consumers and businesses moving on to superior technologies such as VoIP and naked DSL. These alternatives are attractive because it allows internet subscribers to avoid fixed access line rental fees. Also the declining wireless prices are making it cost effective for a growing number of consumers to disconnect their wired service in favor of their cell phones. IBIS World estimates that industry revenue declined at an average annual rate of 7.7% from 2005 to Neutral Tandem is in a position to gain from this decreasing industry. As wired carriers look to lower cost to offset revenue losses they will be delegating more effort into acquiring the best rate. Typically Neutral Tandem can deliver a more competitive fee rate than congested ILCEs. Thus Neutral Tandem stands to gain form the wired telecommunications industry. Wireless Telecommunications Industry participants operate switching and transmission facilities to provide direct communications via airwaves. The services offered by this industry include cellular mobile phone services, paging services, broadband personal communication services (PCS) and wireless public safety services. This has been a rapidly growing industry the past five years. Growth in the industry is predicted to slow down due to 91.1% of the U.S. population already being a customer of a company in the industry. Slow growth will cause market share competition to increase through data bundles and prices. 6

7 With price competition being a primary way of capturing and retaining market share, wireless carriers will seek to lower cost in order to keep margins. In a similar situation as the wired industry, carriers will search for the most competitive pricing for interconnecting. Since most of the major ILECs also provide wireless services they have an incentive to keep interconnection fees high to burden their competitor. Thus Neutral Tandem stands to benefit from the intense competition in the industry. VoIP The industry is composed of companies that provide Voice over Internet Protocol (VoIP) services to consumers, businesses and government organizations. VoIP technology converts voice signals into digital data packets that are then transmitted using the internet. Currently more than 50% of the revenues generated from the industry are from cable companies. Despite realizing about $12.34 billion of revenue in 2010, the VoIP industry is relatively young and starting to gain momentum. The technology is much more cost efficient than wired voice communication and enables cable and internet companies to offer voice services. Since Neutral Tandem's network is able to also transmit cable traffic, they stand to benefit from growing revenues in the VoIP industry. Cable companies realize half of the revenues that are generated by the industry making them very important in Neutral Tandems growth strategy. S.W.O.T. ANALYSIS Strengths Limited amount of substitutes for their services No long term debt Continued stock repurchase shows management still believes stock is undervalued Experienced management team Large IP network allows for a variety of customer types Weaknesses Small company in comparison to some of its competitors limiting its resources Revenue is concentrated to a few customers Do not require minimum charge in customer contracts Company is realizing diseconomies of scale for its IP services Opportunities Potential customers in markets that their network already covers Ethernet exchange is projected to grow, they are positioned to take part of that market VoIP traffic is projected to increase which would lead to an increase in interconnection demand 7

8 Global traffic is expected to increase faster that domestic traffic leading to higher revenue from Tinet acquisition Threats Carriers switching to IP technology which allows for direct connection Government regulation could decrease fees ILECs charge forcing Neutral Tandem to lower fees Loss of current litigation which could potentially cause a fine being imposed and or the loss of patent protection New markets Neutral Tandem enters are typically more competitive so fees must be lowered to compete PORTER S 5 FORCES ANALYSIS Supplier Power Supplier power is moderate in the industry due to there not being many companies that make infrastructural IP network components. There are however a few choices and as long as those companies compete for business Neutral Tandem has a selection of potential suppliers. Barriers to Entry Barriers to entry are very high. There is a large capital investment needed for the network infrastructure. A knowledgeable management team and workforce are also barriers to entry. Buyer Power Buyer power is high for Neutral Tandem. Just two of Neutral Tandem customers bring in 23% of their revenue. Even with the acquisition of Tinet, Neutral Tandems revenues are concentrated from a few customers. Threat of Substitutes The threat of substitutes is relatively low but starting to grow. When carriers update their infrastructure to IP technology interconnecting directly from carrier to carrier will become much easier. ILECs will always be a substitute to Neutral Tandem voice interconnections and occasionally offer lower fee rates. There are also direct competitors to interconnections Level 3, Hypercube and Peerless Network who except for Level 3 are growing. Degree of Rivalry The degree of rivalry is moderately high. Neutral Tandem IP services are similar to those of Level 3, Hypercube and Peerless Network who are always competing for traffic. There is also a clear sign of rivalry with Peerless Network due to them copying software that Neutral Tandem developed. As Neutral Tandem enters into the Ethernet exchange market it will also face increased rivalry from other providers. 8

9 CATALYSTS Upside Acceleration in the use of Ethernet exchange will increase their top line growth Downside A decrease in price of IP technology will increase integration of the equipment by carriers who could then easily establish direct connections COMPARABLES ANALYSIS The selection of companies that were used for the comparables analysis were chosen based on their exposure to similar risk factors, customer base, related services, competitive environment, and growth expectations. Neutral Tandem has three direct competitor, Peerless Networks, HyperCube and Level 3 communications. Peerless Networks and HyperCube are privately held and Level 3 has been performing poorly making it not comparable worthy. I instead used the three major ILECs, Global Crossing ltd, Cogent Communication Group Inc. and Equinix Inc. Since there isn't any direct comparables, many were used to capture all of the criteria used for comparable selection. For calculating the implied price, EV/EBITDA, EV/Operating Cash Flow, EV/Gross Profit and EV/Revenue were all used. EV/Gross Profit was weighed at 35% due to similar forecasted margins across comparables and Neutral Tandem. EV/EBITDA was also weighted at 35% because of small variance in forecasted EBITDA margins. EV/Revenue was only weighted at 15% because of the large variance in revenues realized by comparable companies vs. Neutral Tandem. EV/Operating Cash Flow was weighted at 15% and used instead of free cash flow. This was done because the free cash flow multiples for the comparable companies varied by a substantial amount. Instead of removing it and distributing the weight to other multiples, I used operating cash flow multiple to compare a less volatile type of cash flows. AT&T, Inc. (T), 23% AT&T provides telecommunications services globally. It services currently include landline voice, wireless voice services, data communication services, U-Verse television, high-speed broadband, voice services, managed networking to business customers, solutions and Internet-based advertising. AT&T derives most of its revenue thru their dominant business sectors. Though they do operate as an ILEC they do not push for revenue growth for this segment. Even so its switching and interconnections could be used to replace Neutral Tandem. Due to AT&T similar industry exposure and comparable margin it was weighed at 23%. Global Crossing Ltd. (GLBC), 10% Global Crossing Limited operates in the VoIP and wired telecommunication industries. provides telecommunications solutions over an integrated global IP-based network. It operates worldwide offering a range of data, voice, and security products to carriers. It offers various infrastructure and switched data services, such as IP services, managed 9

10 services, frame relay, ATM services, VoIP services, and traditional voice services. Global Crossing Limited offers its products through a worldwide direct sales force similar to that of Neutral Tandems. This company provides comparable services to Neutral Tandem but is much more diverse in service. It is similar geographically but it is already well establish while Neutral Tandem has to fully integrate Tinet to become a global company. More importantly they have been realizing losses for over three years. Due to the losses and diversity of their products they were given a weight of 10%. Cogent Communications Group Inc. (CCOI), 10% Cogent Communications Group operates in the VoIP, internet and wired telecommunication industries. They provide high-speed Internet access, voice services and IP services. It offers on-net services to the customers in multi-tenant office buildings and to bandwidth-intensive users, such as universities, Internet service providers, and commercial content providers. The company operates data centers that allow customers to co-locate their equipment and access the company s network. Cogent operates in the same industry as Neutral Tandem and offers a few similar services. They do mostly operate in Europe and the U.S. but do realize a small revenue portion from outside of those regions. Unfortunately they have been realizing a loss for over a year but state that its due to expansion efforts. Due to the difference in margins they were weighted at 10%. Qwest Communications International Inc. (Q), 15% Qwest Communications International operates in the wireless and wired telecommunication, and internet industries. Their services consist of data, Internet, video, and voice services in the United States and internationally. The company s voice services include local voice services comprising basic local exchange and switching services; local voice exchange services, domestic and international long-distance services; and wireless products and services. It s clear that Quest primary revenue source is not through switching and interconnecting technology as Neutral Tandems is but they are a possible substitute to Neutral Tandems services. Quest competes with Neutral Tandem as an ILEC but also uses Neutral Tandems services when their networks become congested. Since their debt to equity ratio is much higher than any other comparable, which makes them more risky, they were weighted at 15%. Verizon Communications Inc. (VZ), 23% Verizon Communications operates in three industries: Wireless and Wireline telecommunication and Internet service. Its services include wireless voice, data services, Internet access, broadband video and data, next generation Internet protocol (IP) network services and network access. It provides these products and services to consumers globally. Similar to AT&T and Quest, Verizon does not delegate effort into competing for interconnections and traffic switching. They can be used as an alternative to Neutral Tandem but typically offer higher rates and lower quality. They are in the same industries as Neutral Tandem and also have comparable margins leading to a weight of 23%. 10

11 Equinix, Inc. (EQIX), 19% Equinix provides global network neutral data center services. The Company operates International Business Exchange (IBX) centers, or IBX data centers, across 18 global markets where customers directly interconnect each other customers. Equinix Exchange enables customers to interconnect between IBX data centers at various capacities, Internet connectivity services, and carrier Ethernet exchange services. They currently have one of the largest Ethernet exchange network that expands worldwide. When the Ethernet exchange service starts to increase in percentage of revenue for Neutral Tandem, Equinix will become a direct competitor. They have similar margins, geographically spread the same and will be offering substitutable Ethernet exchange services. Due to Neutral Tandem s Ethernet exchange service making up a small portion of revenue and growth expectancy to only be moderate, Equinix was given 19% weight. DISCOUNTED CASH FLOW ANALYSIS Revenue A Revenue model that separated sales from Neutral Tandem and its new acquisition, Tinet was used. Neutral Tandem gave little information on future business and growth strategy regarding Tinets integration. By separating the company a more accurate forecast of revenues was possible since more information was available to predict Neutral Tandem revenues and conservative predictions were given to revenues generated by Tinets services. My projections are based on Industry projections, historical and company anticipated trends of fees and minutes their network is used. Neutral Tandem Revenue When entering in new markets or biding for a potential customer, Neutral Tandem has to lower its fee rate to make its service attractable. This has been the reason for decreasing average fee rate in the past and will continue on while they continue to enter new markets. The average fee rate will eventually reach a trough and will not decrease from that point. In the model, fee rate is expected to decrease till 2014 where it will remain constant at per minute. The expansion into new markets and addition of new customers also increase the minutes that are used which is expected to decrease as a percent due to a limited amount of markets in the U.S. Tinet Revenue Due to the lack of future expectations for revenue and strategic growth, revenues for Tinet were calculated conservatively. Tint two major revenue service IP transit and Ethernet exchange were projected separately. Ethernet exchange is charged on bandwidth rather than a fee per minute. I trended Ethernet exchange to increase as more customer join to take advantage of the combined networks but to slow in growth to a moderate level as the industry forecast suggests. Similarly their IP service will see an increase in sales due to the expanded network but will decline in growth rate in the future. Combined Revenue When both revenues are combined there is a clear spurge of growth for 2011E, this is due to their customer base expanding drastically in the first year to take advantage immediately of the joined networks. This in turn will lead to an increase in revenues from all services. After 2011E revenue is projected to grow at a moderate rate. 11

12 Cost of Revenue During the next couple of years I predict cost of revenue to increase slightly as a percentage of revenue due to integration of Tinet, but to return to historical levels after the I also expect the decrease in average fee in the IP transit service to be countered by the high margins in the growing Ethernet exchange service. Selling, General and Administrative Even though SG&A has remained stable over time it has recently increased due to the Tinet acquisition. Using available information on the 10k, I predict for it to stay at its high level for a year then trend back down to its historical levels. Depreciation and Amortization Expense D&A has been decreasing as a percent of revenue the last few years because they were realizing a higher percent in revenue than in deprecation. But with Neutral Tandem pushing to expand their network and the Tinet acquisition there will be a higher percentage of depreciation due to the increase in infrastructure and lower revenue being earned in new markets. Tax Rate Neutral Tandems tax rate has been slowly increasing and will continue to do so because a current tax credit with Illinois is expiring. Net Working Capital For net working capital I forecasted a more constant amount of cash being held which is less than historical values. This is done to account for future acquisitions which is very likely because of their minuscule investments in R&D and to account for increasing capital expenditures. Liabilities were kept consistent with historical values with slight increases for payroll payable due to the large increase in employees from Tinet. Capital Expenditures Due to the combined networks of Neutral Tandem and Tinet and a focus on expanding their network, capital expenditures is sure to increase as a percent of revenues. Beta A two year weekly regression against the S&P 500 was ran for Neutral Tandem because they have only been publicly traded since November Their beta is.95 with a standard deviations of.115. This beta seems appropriate because it is higher than well established comparables but lower than comparables that are currently realizing a loss. RECOMMENDATION Neutral Tandem has positioned itself in a way to benefit from industries in decline and increasing. They generate revenue that is growing and projected to continue to grow. Through their acquisition of Tinet they have greatly expanded their network and have become a global operation. They are also prepared to benefit from the increasing Ethernet exchange demand and still have a fair amount of cash and no debt which allows them to complete additional acquisitions. By weighing both the comparable analysis and DCF at 50% a 38.29% undervaluation is derived generating an implied price of $ Management s decision to continue repurchasing $25.0 million of the company s outstanding shares supports the undervaluation. I am recommending HOLD for all portfolios. 12

13 APPENDIX 1 COMPARABLES ANALYSI 13

14 APPENDIX 2 DISCOUNTED CASH FLOWS ANALYSIS 14

15 APPENDIX 3 DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS APPENDIX 4 BETA SENSITIVITY ANALYSIS 15

16 APPENDIX 5 REVENUE PROJECTIONS 16

17 APPENDIX 6 WORKING CAPITAL MODEL 17

18 APPENDIX 7 SOURCES IBISworld TNDM 10-k Factset Google Finance Yahoo! Finance 18