The reason why I like looking at Rightside is because they are a publicly listed company with the three aspects of the domain industry; registry, registrar and aftermarket. Since my last article on the company have things improved or deteriorated and how does this reflect on the overall domain industry.
Let me say from the outset that Rightside is a nice steady business underpinned by a recurring revenue stream. In fact, they are at pains to highlight the recurring revenue model in their quarterly financial presentations. The problem with the business is they are listed on the Nasdaq and as a tech company investors expect more than the current 4% year on year revenue growth rate.
The charts below highlights where the revenue is being generated by the business. The registrar is clearly the driver with over $44m or 80% of the revenue coming from that business unit. The aftermarket has clearly come off the Chinese fuelled peak of $9.3m in Q4 last year and is now settling down at $7.8m for the quarter.
The registry grew by $300K in Q2 so it will be interesting to see what the Q3 results will be. Given that Rightside banked a lot on the success of the new gTLDs the relatively lacklustre performance must be of concern.
These numbers are on the back of Registry aggregator, Donuts, offered $70m for the suite of Rightside domain extensions back in June. In my opinion it’s a gutsy move to say no to such an offer in light of the slow growth numbers. The Rightside management/board are either very sure of a significant upswing in their registry growth projections or just walked away from a great offer.
What is concerning is the Quarter on Quarter Growth rates for each of the business units. The registrar is basically flat and the aftermarket is also looking flat with a seasonal dip in Q1 for the last two years. The registry has dropped from a large initial growth rate off a small base to a much more modest level. It will be interesting to see if the uptick in Q2 is at least sustained in Q3.
The Year on Year Growth rates also reflect the downward trends of all of the business units (registry references the left hand axis). The overall growth has decreased from 113% back in Q2 2015 to 104% in Q2 2016. It’s clear that there aren’t any massive growth prospects from the fundamental drivers of the business.
According to the July 2016 Domain Industry Brief put out by Verisign there was a global growth in domain names of 11 percent, year over year. The good news for Rightside is the registry has grown by 21% in the same period of time so they are beating the global rates. The bad news is the engine of the business, the registrar, has been basically flat with year on year growth of 0.5% (Q2 2015 vs. Q2 2016).
Below are charts for the number of domains currently in the registry (source: ntldstats.com) for .ninja, .news, .lawyer and .consulting. These four extensions were highlighted in the Rightside quarterly earnings report. As can be seen, there is a significant amount of growth but each of them has a sharp decline as end users elect not to renew the domains. Renewals are the challenge that afflicts all registries as without them the reoccurring revenue model fails.
I said this in my last blog on Rightside…..the challenge for the company is how to move investors from playing the dividend to the capital return game. I would expect that if the company paid a dividend then many of the shareholders would be scratching their heads and wondering what happened to the new gTLD unicorn promises.
So getting a “pop” off a good solid revenue base must be at the top of mind for the senior execs at the company. At the moment there doesn’t seem to be any rumblings of amazing new tech or even acquisitions coming from the Rightside camp…..but then again, it may still happen. If nothing happens then I wouldn’t be surprised if the recent surge and collapse in the share price will occur time and time again as investors buy and leave the new gTLD dream.
Given all of the data from Rightside are the new gTLDs making headway? It's without question that some are and when you are effectively eating into a monopoly's market share there is only one initial direction and that's up.
I'm actually a strong believer in the new gTLDs....they will happen. The question that I'm constantly asking myself is when will the become mainstream? This is why as an industry Rightside is such an important company to watch as their numbers will very likely indicate whether the when has moved to now.
As always, before making any investment decisions please seek your own professional advice.