Is Rightside on the Wrongside?

Is Rightside on the Wrongside?

I’ve just spent the last couple of hours reading reports and listening to updates on publicly listed company, Rightside, post their sale of Enom. Trawling through all the data has been confusing to say the least with numbers from different sources not seeming to correlate with each other. After all of this what are my conclusions?

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With the sale of Enom, Rightside is putting more of its eggs in the new gTLD basket. Is this a brilliant move or more of a train wreck in slow motion? Obviously, a lot will depend upon the growth in the ngTLD market.

nTLDstats.com is suggesting Rightside grew their number of registered ngTLDs by 29,537 last quarter which means they are growing at about 13%. From a revenue perspective, they managed to increase by 23% in Q1 2017 compared to Q1 2016. All these are good healthy numbers.

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Rightside - Quarterly Results are Ho-Hum...

Rightside - Quarterly Results are Ho-Hum...

I just listened to the Rightside quarterly reporting results webcast by CEO, Taryn Naidu. To summarise, there’s been some cost cutting and quarter on quarter growth is the same for the registrar business and declining for the registry and aftermarket.

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To be fair to the Aftermarket business it’s off a bumper third quarter and so the revenue of $9.3m isn’t a bad result when you consider it grew at 9% compared to Q3.

Verisign reported on 17 Dec 2015 that the number of domains registered worldwide across all TLDs has grown 5.2% year over year. The Rightside registrar business unit is growing at a sluggish 1.9% (up from 16m to 16.3m domains) by number of domains. Some questions need to be asked why the registrars are not even close to keeping pace with the natural global growth rate.

Rightside by Business unit

In terms of revenue, the registrar business grew by 2% in Q4 and overall for the year by 9%. It can be inferred that the increase has largely been off the back of TLD price hikes (eg. .net by 10% in Q1) which has resulted in an overall 3.7% increase in the average revenue per domain.

Rightside Growth Rates

The registry business revenue of $2.5m is still not having a large impact on the overall revenue and is unlikely to in the near future. It’s still early days but the decline in the quarter on quarter growth rate from a high of 45% in Q1 to 5% in Q4 must be concerning.

It was pointed out on the webcast that the benefits from the recent layoffs and some of the marketing efforts were not evident as yet. The jury is still out on the marketing initiatives but I believe the layoffs, although sad for those impacted, were a move in the right direction by the company.

During the webcast there seemed to be a large emphasis on China and how Rightside is poised to move aggressively into that market. Given the decline in growth in the new gTLDs it almost feels like Rightside is looking for the Chinese market to provide some of the sizzle to get investors interested in the capital valuation game again.

It will be interesting to see how this strategy will impact the bottom line. There’s a lot happening in the Chinese market but I’m unsure of the long-term sustainability of some of the numbers being reported.

Some people have suggested that I'm somehow against Rightside. This couldn't be further from the truth. It's a really good solid business that over the long-term will perform well. In my opinion, the challenge Rightside is facing is how to move from putting all their hopes in the new gTLD basket, that's not paying off fast enough, to something else.

I would suggest that rather than hope China dramatically impacts the bottom line that innovation is what tech-companies really do. This suggests, the investment community is looking for Rightside to announce something "interesting" that has a lot of growth potential.....time will only tell whether my thinking is right or not.

As always, before making any investment decisions please seek your own professional advice.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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Fix the Problem Enom!

Fix the Problem Enom!

There are a number of basics to business. The first is that you remember to collect the money and the second is to never forget the customer. It just so happens that for quite some time registrar, Enom, has forgotten both of these.

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You'll have to excuse the little rant.......About 2 weeks ago I went to top up my account for my domain renewals. It’s a regular thing that I do and I wasn’t expecting any surprises. After clicking the “submit” button I was presented with the server error page below.

Enom Error

I’ve been around technology for a long time so although the error was annoying I wasn’t that phased by it. A couple of weeks later I decided to try adding money to my account again and I received exactly the same error. You would think that after a couple of weeks (at least) that any problems with the payment system would have been resolved.

Sighing to myself I dialled the help desk number and after pressing a series of buttons to select technical support I waited on the international call for around 15 minutes until I finally gave up. I then recalled the number and selected the options for sales support……20+ minutes later I was finally speaking to a support desk person.

They were actually quite helpful and indicated that my credit card had expired and that I needed to add the date to the profile part of the Enom system. I was a little confused by this as I said that each time I added my credit card for the payment I put in the correct expirey date and received the error page.

The person said they have known about the problem for a long time and that for some reason the expiry date for the credit card is pulled from the profile and not from the form you just filled in for payment……go figure?

I politely suggested that someone should really fix an error that crashes the website and the support person became…how shall I say…..less than helpful. Maybe he was just a little frustrated with the tech-teams lack of bug fixing....who knows? I suggested that I blog about my experience and point out to other Enom customers how to get around the problem and the support person thought that was a great idea.

What I would like to know is how long this problem has been going on for and why the heck the support people haven’t communicated to the development team about it? It’s clear that the support people have a work around….so the question has to be asked, why hasn’t Enom’s CTO fixed a problem that strikes at the heart of revenue collection?

Since Enom is holding the valuable assets of a lot of domainers…..what would happen if some of these domains began to drop because people couldn’t get onto the support team for the magic work around? My guess is there would be a lot of law suits flying around.

So Enom, my advice is to stop procrastinating and fix the problem rather than waiting around for a disaster to happen. It improves revenue, customer experience and stops potential legal issues.

In the meantime, if you are an Enom customer the work around is to update the date in your profile for your credit card before adding it again into the payments page.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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Rightside - What are you doing?

Rightside - What are you doing?

Due to being a publicly listed company, Rightside, is a really interesting case study of the entire domain industry and in particular the new gTLD space. The company has accumulated enough domains that it is a good representative sample of the domain space.

So back in November last year I conducted an analysis of Rightside wrote an article (click here) that predicted there would be layoffs. I stated:

Eventually, the investors will come in and hack the expense line to pieces (ie. fire lots of people) to get the profits up since their returns are unlikely to come from capital growth.

I really didn’t want to be a prophet of gloom and doom but several days ago Rightside downsized by 6%. I am deeply sorry to those people that lost their jobs….it’s never a fun experience to suddenly find yourself without a pay check.

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It’s clear that Rightside needed to get their costs under control and generate some profit for the investors. Sadly, I wouldn’t be surprised if there was another round of layoffs towards the middle of the year. The reason why I believe this is that fundamentally nothing has changed with the business.

The registry business is still a very small part of the overall revenue. nTLDstats shows that the new gTLD space is essentially following a linear line to the right and not exhibiting any sort of geometric growth. In fact, it could be argued that the Rightside registry has slowed down growth over the last few days…..but the data around this is inconclusive as yet.

It was originally hoped that the registry was where the company was going to get all of its sizzle from with the market. To get a good exit for some of the early investors Rightside really needed to move into playing the capital value game versus the incremental profit model to provide some sort of investor return.

The staff reduction is clearly an attempt for the management team to buy time for the cumulative effect of the registry business to ultimately have an impact on the bottom line. Such a move would have meant the board (which has a number of investors) is now resigned to play the long-term game prior to exiting their positions. This must of been quite disheartening.....

As I said in my previous post,Rightside needs some new technology that will rapidly scale. This means that any idea that involves either a long corporate sales cycle or a change in consumer mentality is out. The management team doesn’t have the time for the first nor the resources to tackle the second option.

I have a few ideas on how to do really scale but they would require a recognition that the current strategy is not delivering the results that are really required for big returns. Don’t get me wrong, in the long-term, Rightside will produce some great results….the challenge is whether the market will allow the company the time to continue moving forward in the same manner.

I should say that I do not own any shares in Rightside and would recommend that you seek professional advice prior to investing in any company.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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The Rightside Challenge and the New gTLDs

The Rightside Challenge and the New gTLDs

Rightside, a publicly traded registrar/registry, released their quarterly earnings statement this past week and it made really interesting reading. What I found fascinating was the picture that was being played out in the domain sales space and how it reflected on the new gTLDs.

Rightside Share Price

The Rightside share price (chart above) has suffered at the hands of investors as they struggled to come to grips with the new gTLD phenomenon. The slide down from a height of $15.85 per share as ICANN dragged its feet was momentarily bolstered by the April quarter results from actual release of a number of extensions. Right now, investors are still wrestling with the potential financial windfall from new gTLDs as the share price now languishes at $7.63.

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It’s difficult for any business to try and communicate to all of the stakeholders the benefits of a strategy that may suddenly have an extended time horizon. This looks to be the case with the capital markets, Rightside and the new gTLDs…..but is there a glimmer of sunshine coming through the cloudy sky? Let’s begin to unpack this…

In the previous quarter’s report there were a couple of slides that really leapt out at me. The first one showed that back in Q2 2015, 83% of revenue was subscription based and that 74% of domain registrations were being renewed. It also helps that the average revenue per domain is continuing to trend upwards. These figures are underpinning a very healthy business that is continuing to grow quarter on quarter as the Rightside team executes the business plan.

Financial Model

According to the Q2 report the target revenue growth is 9-15% in 2015. I crunched some numbers and it looks like they’re currently (ie. Q3 2015) at about 13% above Q4 2014 so it looks like they are going to hit the top end of the growth target…..all good news for investors!

Despite the good news of hitting targets I thought that it would be a worth digging further into the numbers to see what was going on. If we are to look at the revenue graphs you’ll notice that both the Registrar and the Registry are very slowly trending upwards to the right.

Revenue by business unit

The Aftermarket is actually pretty flat….which is surprising given the level of cash recently being injected by Chinese investors into the domain space. It will be interesting to see if there is an uptick in the Aftermarket space in the next quarters report.

Given the renewal rates, the registrar numbers weren’t too surprising. A large number of domains produces a lot of money in subscription revenues. What did catch my eye was the registry growth.

There seems to be a huge amount of money being pumped into the new gTLD space and yet the actual revenue numbers seem to be quite small. Yes, the business unit is just over a year old but even still, I would have thought that there would have been an initial kick up in actual revenue.

Quarter on Quarter Growth Rates

The second chart shows the quarter on quarter growth rates for the three business units. In this case the registrar is very flat and typically growing at around 2-3% per quarter….although this does aggregate up to 7.6% for Q3 2015 compared to Q4 in 2014. It’s only a smidge above the annual 6.5% growth rate for the entire domain registration space but shows that Rightside is slowly gaining market share rather than losing it.

The Aftermarket is more volatile with swings from 85% of the previous quarter to 116% since Q4 2014. The business unit is doing $7.8m on average for the three quarters in 2015 which means that it is 90.3% of Q4 2014 or exactly line ball if you compare the first three quarters of 2015 vs. the last three of 2014.

What is incredible is the change in growth rate for the registry business. There has been a sharp reduction in quarterly growth from a high of 250% to a current level of 26% per quarter. It is early days for this business unit and some volatility is expected. Consideration must also be given to these figures being off a low starting base.

This registry result would be a great result for an established business but it poses a number of questions about what is happening in the new gTLD space. More than half of the Rightside Q2 report was dedicated to explaining what new gTLD’s are to investors. This makes it very clear that Rightside is putting a LOT of eggs in the new gTLD basket.

For example, there’s even a slide that poses the typical investor hockey stick scenario. It essentially says, the whole world is the market for the new gTLDs….if only we get a small slice of this big pie we will win big time! I must admit that I really don’t like these types of slides as they come across as being quite silly (slides 13 and 15 of Q2 presentation – see below).

Market Size

From the chart below the incumbents have not been able to secure the “new market opportunity” and it’s very unclear whether the new gTLDs are going to be able to either. As the market matures, I wouldn’t be surprised if the new gTLDs end up settling into a growth rate of around 6-8% per annum which means the aspiration of the “new market opportunity” will largely remain untapped.

Market Size

The fuel for the new gTLDs to secure massive growth has to be found in the sales and marketing budget, in the case of Rightside its $2.6m for the last quarter. When we’re talking about changing human behaviour on a global basis I would have thought that this budget would have had to be much, much larger. The next couple of quarters will really provide a good solid picture of the new gTLD space and whether it’s going to take off or not…..it will be interesting to see.

The problem is that the markets want Internet companies to have mega-unrealistic growth rates that they can fall in love with. They want the next dropbox or snap chat that they can madly invest in and then dump after they’ve made a capital killing on the ride up.

Here’s the challenge for Rightside….it’s a good solid business with sustainable revenue into the future. No problem at all with that….BUT….it looks and feels like a mature long established company in the mining or industrial sector that is selling widgets to other businesses. Great business but really boring.

The impression is that Rightside has looked to the new gTLDs as the sizzle that would get the market excited about them….it’s early days yet but don't think this is going to pan out quickly enough for the company. Eventually, the investors will come in and hack the expense line to pieces (ie. fire lots of people) to get the profits up since their returns are unlikely to come from capital growth.

In my opinion, what Rightside needs to do is speculate by buying a few bleeding edge innovative companies. Off the back of their good solid revenues they need a nascent technology in the domain space that is uninhibited by growth constraints. A technology that doesn’t need to convert the masses or do corporate deals that take years to come through. This is the sizzle that will get the market excited enough about the share price so that investors will once again play the capital game.

I get the feeling that if the investors give Rightside enough time then the company could become one of the great flagship in the domain space. Only time will tell whether the management team will be sucked into the vortex of quarterly targets or are given the space to revolutionise the entire domain industry with a fresh sense of vision. This will be an exceptionally difficult task but given the team line-up there is a good chance they could pull something like this off.

Just to make it very clear, I’m actually still quite bullish about the new gTLD opportunity for domain investors. What I do believe is that it’s going to be a 5-7 year time horizon for any investment to yield reasonable returns. The Rightside numbers have reinforced this perspective and my personal position of “keeping my powder dry” and waiting for the most opportune moment to invest.

I should say that I do not own any shares in Rightside and would recommend that you seek professional advice prior to investing in any company.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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