Elliot Noss, president and chief executive officer of Tucows (Nasdaq: TCX), joined the MOI Global community at the Latticework 2017 summit, held at the Yale Club of New York City in September. John Lewis, noted value investor and managing partner of Osmium Partners, moderated the wide-ranging keynote Q&A session.
Under Elliot, Tucows challenged how software was distributed in the 1990s and how domain names were offered and managed in the 2000s and is challenging how mobile phone service and fixed Internet are provided today. For nearly twenty years, Elliot has championed the Internet as the greatest agent of positive change the world has ever seen. Through his role at Tucows, his involvement in ICANN, and his personal efforts, he has lobbied, agitated and educated to promote this vision and protect an Open Internet around the world.
We are pleased to share a transcript of the session.
The following transcript has been edited for space and clarity.
Shai Dardashti, MOI Global: In a previous life, I managed a fund. After I closed the fund I worked for John Lewis at Osmium Partners. I’ve seen John in different contexts, and I’ve seen the way he invests; I’ve seen him handle different personal dynamics. John is a phenomenal human being. I’ve also previously invested in Tucows, and Elliot Noss will be joining us in a few moments to share a bit more of how he sees “Intelligent Investing in a Changing World”.
We don’t give “CEO of the Year” awards, but Elliot deserves one. He has an element of Henry Singleton’s DNA in terms of share-buyback behavior. There’s also quite a bit of pure Charlie Munger-style long-term business development creativity in what he’s building.
John Lewis, Osmium Partners: One of the big takeaways we’ve seen as investors is how hard it is to win in the capital markets. The winners really win. In our investor presentation this year, we showed that from the IPOs of both Netflix and Amazon both stocks are up 1000x. We’ve looked at the math behind the biggest winners in public equities. The winners win disproportionately. This goes back over a hundred years. One hundred stocks have made up almost 40% of index gains since 1925, while 50% of companies ultimately died.
I first met Elliot in 2007, and he has been an extraordinary value creator. He’s in the early innings of having a remarkable long-term run. Elliot has executed eight Dutch tenders and repurchased 50% of the outstanding shares at about one tenth of the recent price. He has paid about one times EBITDA on this year’s numbers. We’ve seen him make one smart investment after the next. You’ve been CEO now for twenty years?
Elliot Noss, Tucows: Over twenty years, yes.
Lewis: Would it be helpful to give a quick overview of your three businesses?
Noss: We are the largest wholesalers of domain registration in the world. GoDaddy is the largest domain name registrar. We made up this creature, “wholesale domain registration” nearly twenty years ago. That is essentially a platform business, a relatively low-growth business — if you want to talk about mid-single digits as a growth business. It’s a platform business that spins off loads of cash.
We’re an MVNO, which means we buy capacity from — we’re not legally allowed to say it, but if you go and search the coverage map, you’ll see the magenta map and you can figure it out. The MVNO business is great because U.S. mobile phone service is the second-most expensive in the world (second only to Canada, which is where I’m from). We have been able to build a business making north of 50% contribution margins, where our customers are paying $23 a device and they are measured (by net promoter score) as the happiest, most satisfied mobile-phone customers in the world. That’s a scrappy business from a customer acquisition standpoint, where you have essentially no industry growth; everybody who’s going to get a mobile phone already has one. That is a tough business route — taking share — but [we are] less than one-tenth of 1% of the market. We’re a termite eating a tree: there is a lot of room and the tree doesn’t notice.
Now you have these two good businesses, both of which spin off cash and require virtually no capital. We bought back our stock for as long as we could, then the telecom world presented itself again to us, and for the last 2.5-3 years we’ve been going hard fiber to the home.
We fundamentally believe that we’re at the beginning of a 15-20-year cycle, where infrastructure built for telephone or television has been retrofitted essentially to deliver the internet. It’s a simple thesis to say that at the end of a 15-20-year cycle, the vast majority of connections in the U.S. will be end-to-end fiber with a bit of Wi-Fi hanging off the edge. Two years ago I would have said that at this point there would be 50 or 100 companies copying us, but I’ve come to appreciate that there’s an intersection around operating capabilities — we’re a bunch of old ISP guys at heart — capital, and the ability to manage a construction project, which might be a bit rarer than I first thought, and so the window stays open.
Lewis: Talk about your core DNA and the strategic focus in each of your businesses in terms of customer satisfaction. Why do you feel like you have a lot of growth in the markets you’re in, and how have you been able to generate attractive returns on capital?
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