Tucows (TC:TSX) is a pretty familiar brand to many and an influential Internet pioneer. The Ultimate Collection of Winsock Software (TUCOWS) was established in 1993 by Scott Swedorski, a library worker in Flint, Michigan as a way for people to easily download software at little or no cost. Essentially, Tucows invented shareware or freeware, which is the root concept for Open Source software (like Linux) and could be a conceptual ancestor to emerging concepts such as "cloud computing".
However, since the beginning of this decade when Internet Corporation for Assigned Names and Numbers (ICANN) agreed to break Network Solutions domain name registration monopoly, the company has essentially been a wholesaler of domain names along with some of the peripheral services around it such as email and security. Since then it has exhibited steady, albeit unspectacular, growth while being eclipsed by younger start-ups like GoDaddy.
Interestingly, recently reported Q1 performance shows 17% growth in its domain business over the previous year, while the rest of the business remained flat or contracted. Total sales for the quarter were reported at $20.1 million, or 7.4% ahead of last year's performance. Reported earnings for the quarter were $1.0 million, or $0.01 EPS versus a $1.1 million loss, or $(0.01) loss per share last year. In the depths of a significant recession, investors may find this surprising.
However, as more people get laid off from "jobs", many are likely to begin new careers as self-employed contractors. And, as during past recessions, laid-off skilled workers are establishing start-up businesses in their fields of expertise. The numbers may support this trend now. According to StatsCan "The surprising rise in the number of people working in April in Canada was the result of an increase in self-employment, the federal government agency said. Self-employment rose by 37,000 in April, while there was little in public- and private-sector employment". These trends are likely to strengthen elsewhere in the world where entrepreneurship is encouraged.
The rise of the independent contractor is good news for Domain registrars. Through various blogging applications, it is easier and more cost effective than ever for people to create a web presence with an individual domain. Cha-ching for domain registrars!
Many of the new businesses are likely to fail in the short-term, or become abandoned as the economy picks up and independent contractors begin to get hired by larger entities. All of this potential future volatility means domain names do not renewed, which means that they get recycled and resold. Cha-ching for domain registrars!
The domain-name game is boring, and margins are pretty thin through commoditization. However, we should see a continued resurgence in the business for the next few quarters as the employment markets become more volatile. In its quarterly results press release, Elliot Noss, CEO of Tucows appears to confirm the trend. "During the first quarter of 2009, we saw continued strength in domain registrations through our OpenSRS wholesale services business, marked by the highest number of new registrations since the second quarter of 2000 and strong year-over-year growth in renewal transactions." The stock is trading at 8x FYE runrate EPS.
Are there other technology vendors that could benefit from this emerging self-employment trend? Besides online employment services like MonsterOnline, investors should look at specific SaaS software verticals such as accounting, converged communications including VoIP, email, and calendaring solutions that start-ups may need. OpenSource word processing, spreadsheet and presentation software may be popular as long as they integrate with MSOffice formats.
Social networking sites should benefit from increased self-employment, but not in a way the media seems to expect. For sustained value creation over time, investors may find an IPO from LinkedIn could be more interesting than one from Facebook. Independent contractors are likely to spend more time on LinkedIn, and find value that they are more likely to pay for (in comparison to Facebook).
On the downside, mobile susbcriber churn may be higher as people migrate off corporate mobile plans to personal plans with more modest rate plans. Vendors with giant corporate clients may be hurt, while SME specialists and low-cost VMOs may benefit.
I do not own shares of any of the Companies mentioned in this post.