Since the emergence of the internet just a small number of top-level domain names (TLDs) have been in use. TLDs are the last part of the web address (domain name) to the right of the last dot for instance like .com, .net or .org., while second level domain names (SLDs) are the first string of characters to the left of the last dot. In 2008, the Internet Corporation for Assigned Names and Numbers (ICANN), a not-for-profit corporation that has been responsible for the technical coordination of the domain name system (DNS) since November 1998, adopted a policy to open up the DNS and created a programme through which any entity could apply for and be delegated a new gTLD if it met a number of criteria established by ICANN. After eight years, the first round of the introduction of new gTLDs is still in process. Minds and Machines (MMX) participated in the programme.
MMX currently fully / majority owns 25 new top-level domains (gTLDs). Moreover, the company is partnering on a further 4 new gTLDs. In addition, MMX has interests in a further eight contested TLDs – .cpa, .eco, .gay, .home, .hotel, .llc, .inc and .music – all of which remain in various ICANN associated processes. The company expects that some will move to private auction (see below). Moreover, management is currently unwinding the loss making registrar business. Consequently, MMX has become a pure play registry business.
When I invested in the company roughly one year ago the question was whether the new gTLDs will be able to take market share from the existing TLDs (country codes and Verisign’s .com / .net). At that time I wrote the following:
“Now there are roughly 300 m domain name registrations across all TLDs. Currently, new gTLDs have a market share of less than 2% with roughly 5 m registrations since February 2014. Awareness for new gTLDs is still low and only 65% of the new gTLDs have been introduced to the internet so far.
Let’s assume for example, new gTLDs can grab a 15% market share over the next two years. This will lead to roughly 50 m domain name registrations across all new gTLDs (taking into account a 10% market growth over that period). With a renewal rate of let’s say 70%, this means that roughly 15 m new gTLDs have to be added each year to keep that level constant.”
What happened over the last year? As of June 2016 there were roughly 316 m TLDs across all types. New gTLDs have a market share of more than 7% with roughly 23 m registrations. There have been a number of quite successful launches of new gTLDS during the last twelve months which added substantially to registrations. Another push might come from global brands like Google or Amazon launching their new gTLDs causing registrations to further accelerate. In addition, renewal rates seem to be quite strong. In the case of MMX annual renewal rates were between 70% and 80% for the total portfolio of launched new gTLDs since mid-2015. Moreover, Verisign’s recent acquisition of the new gTLD .web for a purchase price of USD 135 m indicates that there is value to be found in new gTLDs. Verisign runs the registry for .com and .net, and is therefore competing with the new gTLDs. On the other hand, roughly 55% of all new gTLD registrations are parked domains with a parking page and without content. In many cases investors are buying the domains and speculate on turning them to end users at a higher price. Still, the ratio of parked domains has declined from 71% to 55% since the beginning of the year.
I continued to make the following assumptions:
“Hence, with an average price of USD 20 per new gTLD and 50 m annual registrations the new gTLD registry market could grow to USD 1 bn over the next two years. This is roughly equal to Verisign’s current revenue…
…Overall, I believe that MMX accumulated a relatively good portfolio of new gTLDs and can therefore retain at least a 4% market share. This results into a potential revenue for MMX from the registry business excluding services for clients and the registrar segment of USD 40 m.”
At the end of June 2016, MMX had roughly 729,000 new gTLDs under management compared to 279,000 at the end of 2015. For the most part, the increase is due to the success of .vip, which racked up over 400,000 registrations in its first month starting in May 2016. This makes it the most successful new gTLD launch in the industry to date. Most of the domains were sold in China, a market were MMX was not present before the launch of .vip. The existing portfolio excluding .vip grew 11%. As of today domains under management stand at roughly 750,000.
The company does not publish the average price per domain. In 2015, total billings were USD 7.9 m and the company had 279,000 domains under management at year end. This translates into an average price estimate per domain of USD 28. 56% of billings were generated with so called geo domains like .bayern and .london though they represented less than 35% of domains under management. Hence, pricing for MMX’s various new gTLDs differs quite a lot. For instance, the aggressive price promotion run at the launch of .work in 2015 lead to relatively low average prices, while a domain like .law restricted to accredited users only predominantly contains premium prices.
Until the end of June 2016, roughly 426,000 .vip domains were registered and the company billings reached more than USD 6 m leading to an average price of roughly USD 14 per .vip domain. Hence, the average price per domain for the whole portfolio will decline in 2016.
The table below provides the economics of MMX’s pure play registry business:
MMX has a scalable business with a relatively high operating leverage. I do believe that the company will be able to further grow domains under management. At the same time the price per domain should decline. I believe that an average price of USD 15 per domain is a conservative assumption. Current gross margin is 85%. Cost of sales comprise ICANN fees, hosting costs and other costs directly related to the sale of goods. Gross margins should be kept stable going forward. Management is reducing operating expenses and is targeting USD 6.0 m per annum from 2017. Cash conversion is pretty high as cash is usually collected the month following a domain registration while revenue is accrued over the billing period which is usually twelve months.
In my original write up, I assumed a significantly higher revenue in future periods. At the same time, it seems that the company will be able to generate higher margins than forecasted. Since my original write up, the predictability of future cash streams has grown significantly. With a new pragmatic shareholder base supporting a management team that focuses its efforts on streamlining the business by reducing costs and focusing on the registry business only, the company should be able to generate roughly 70% of revenues on a recurring basis.
Fully diluted shares outstanding stand at 804 m. The current ongoing tender offer will reduce the share count by 100 m. At the same time, MMX is selling 42 m shares at GBP 0.13 or USD 0.169 per share to Goldstream Capital Master Fund I, a Cayman Islands shell company owned by Chinese private equity firm Hony Capital. This brings the total share count to 746 m. At a current price of GBP 0.125 or USD 0.163 per share the company’s equity value is USD 121.3 m.
Currently, the company has roughly USD 31.0 m in free cash on hand. Shares can be tendered to the company at GBP 0.13 or USD 0.169 per share. This will reduce the cash balance by USD 16.9 m. The private placement to Hony Capital will add USD 7.2 m in cash. After these transactions net cash will sum up to USD 21.2 m. Consequently, the company’s enterprise value is USD 100.2 m. Hence, this implies a 21.6 times multiple based on current domains under management. I believe that the company should be able to grow domains under management to one million within the next twelve months increasing the attractiveness of the company’s valuation (11.4 times EBITDA).
This valuation excludes the eight contested domains in which MMX has an interest in. Historically, many of the contested gTLDs were transferred to a private auction process were the successful bidder is paying the purchase price to the other auction participants. A large part of MMX’s existing net cash stems from these private auctions proceeds. In addition, the company has an interest in three additional domains including .dds, .luxe and .budapest which have remained unlaunched so far.
I also would like to point out that a consolidation process might have started recently with two of MMX’s competitors being involved. In July 2016, Rightside rejected an offer from Donut to buy their portfolio of new gTLDS for a purchase price of USD 70 m. Rightside’s portfolio consists of 40 different extensions. To date the portfolio achieved 550,000 registrations led by .news, .rocks and .live. Rightside’s CEO mentioned that he targets revenues of USD 50 m to USD 75 m within the next three to five years coming from this portfolio and regards the offer as too low.
MMX is controlled by British financial investors with Henderson Global, London and Capital Asset Management, Hargreave Hale and Oryx controlling together 54% of shares outstanding. Therefore, it will not come by surprise if MMX is part of the consolidation process going forward and hopefully at the right price.
Currently shares are trading at GBP 0.125 below the tender offer of GBP 0.13 per share. I will tender 30% of my shares assuming that some shareholders may sell less or none of their pro rata entitlement. The outcome of the tender offer will be announced on October 4, 2016. For the shares tendered, I will realize an estimated 28.0% total return and a 19.0% IRR.
Furthermore, from today on I increase my holding in MMX as a percentage of the total portfolio to 3% with a limit price of GBP 0.13 per share.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!