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Half-year results from Internet domain name specialist Minds + Machines (LON:MMX) reveal a company that is changing gear.
The company has been laying the groundwork for some time, applying for the rights to generic top level domains (gTLDs) – the part of an Internet address after the final dot - in the land grab that followed the relaxation of restrictions on the range of gTLDs that are available.
It is still in the running for some more domains that have yet to be released, but the emphasis is clearly switching to capitalising on the assets it already owns.
In the first six months of 2015 it incurred US$2.12mln in sales costs, whereas in the same period last year, the cost of sales was nada, zip or zilch.
The first half of last year also saw the company enjoy a windfall of US$11.86mln as a result of withdrawing from the auction process for a number of gTLDs, whereas this year the windfall had narrowed to US$4.46mln.
It’s a slightly odd function of the whole bidding process for Internet domains that the winner of the auction process pays those who lost out in the auction, and while getting rewarded for not winning is all very nice, it is not a sustainable long-term business model for Minds + Machines. It is more interested in acquiring the rights to gTLDs and earning money from them – year after year after year.
This process has already begun, with first half billings of US$1.97mln well up on billings of US$449,000 in the first half of last year, and the company is expecting the pace to pick up even more in the second half of the year.
Contrary to what Kevin Costner’s character might have said in the film Field of Dreams, it is not enough to think “If you build it, they will come”; Minds + Machines has had to splash the cash on sales and marketing to raise the profile of the new domains, which include juicy Internet properties such as .london, and .wedding.
Increased marketing costs and lower payments from failed auction bids saw the company slide into the red at the halfway stage, with adjusted underlying earnings, or EBITDA, showing a loss of US$1.22mln, compared to a positive adjusted EBITDA of US$5.72mln at the halfway stage of last year.
Nevertheless, the company is still eyeing a move into the black in 2016, and, with a better understanding of how to promote and sell its domain names and encouraged by initial renewal rate reports, which indicate positive figures for .london launched in the first half of 2014, Minds + Machines is confident it can achieve this.
At the end of June, Minds + Machines said 217,200 domains were under management, representing 3.43% of the new gTLD market. In the second quarter of 2015, there was a net increase in TLD registrations of 2.2mln, of which 1.8mln (82%) were for new gTLDs, so this is clearly where the big growth is.
The second half will see the launches of .law, .abogado and .miami, while there is also the prospect of renewals from gTLDs launched last year. Early indications for .london point to renewal rates being significantly above industry norms, the company said.
To help it on its way to profitability, the company has already reduced projected annual costs by US$2.24mln and in its interim results it revealed it had identified another US$700,000 of cost savings.
Not that the company is running short of cash; at the end of June it had cash of US$48.3mln, and this could grow, depending on whether it wins or loses the private auctions it is still involved in.
The company has authorised a stock repurchase programme that could see £15mln of shares bought back in the open market over the next 12 months, which should underpin the price of the company’s shares.
“As we grow revenues through our channels and premium name sales we will invest in marketing our vertical TLDs to their natural audiences. We also continue to explore improved strategies for monetising our TLD portfolio, as for example with our Emerald Names initiative,” Van Couvering said in the results statement.
The Emerald Names initiative addresses the premium end of the TLD market, and the margins are very, very attractive.
“We are seeing early positive signs with regard to the launches of both dot law and dot Miami. Combined with initial indications of good renewal rates from dot London and the other TLDs that we launched in Q3 of 2014, we expect these initiatives to deliver a significantly improved H2 performance and long-term growth,” Van Couvering said.
Of the two, the .law domain looks likely to be the better performer, but both have promise. "We're feeling pretty chipper," Van Couvering told Proactive Investors.