Talk America (TALK) released its Q4 earnings yesterday, delivery $0.25 EPS and beating forecast by a penny. Ater listening to its earning conference call I have more confidence on the company.

TALK's business model is simple: it gets local access thru Baby Bells with wholesale price, and sells it at retail price with bundled long-distance service thru its own network. In terms of financials, it is running the business like this:

1) Acquire new customers at ~$100 per line
2) Get an average revenue of $50 per month per line
3) Keep a gross margin of 46% by only servicing profit markets - contribution margin is $23 per month per line.
4) Keep a low churn of 5% per month

If everything works this way, this model is going to deliver customer IRR > 100% (with a payback of 6 months.

TALk also raised its guidance for 2004, now targeting > 40% YoY line growth, and revenue growth. Adjusted EPS is guided to be $1.18 to $1.25 per year. And the actual earnings and cash flow will be higher due to tax benefits (thanks to massive losses years earlier).

So here is my back-of-envelope calculation:

1) TALK closed today at $10.42, representing a market cap of $275M.
2) TALK has a deferred income tax benefit of $64M in the book
3) TALK can deliver $1.20 EPS next year, or $31.8M next year; FCF will be similar to EPS number because the DSO is stable with the monthly billing
4) The current price is only 6.6 times FCF even without considering growth prospects and management's effort to buyback shares and payoff debts.

Furthermore, I like the management a lot for the delivery of quarter earnings:

1) The earning release includes the cash flow statement, which is a rarity in earning releases
2) The slide presentation accompanying the conference call includes almost all the information investors need to know.