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?

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.

What I don’t find believable is the slide in their quarterly presentation that suggests the registry will suddenly grow to a yearly revenue of $50m by 2019. Given the almost linear growth rate across the last 12 months I’m finding it difficult to believe that there will be a massive increase in revenue in just over two years.

It’s almost as if the $50m number in the presentation was put out there as an ambit claim to get people interested in the registry again. The straight line linear projection would suggest the revenue line will be closer to $22m by the end of 2019.

So where am I potentially wrong? There are three things that could happen to bridge the $28m gap.

1.  The average price per domain could be increased.
By playing with the domain price demand will be impacted and as Uniregistry recently discovered this could have dire consequences for domain sales. It also means that domain investors need to be aware that Rightside does have this leaver.....don't assume a stable predictable shareprice in your ROI calculations.

2.  Premium domains start flying out the door.
This is unlikely to happen and after the initial flurry of a TLD launch it’s more likely to slow down as more supply of domains hits the market.

3. ngTLD sales suddenly go gangbusters.
This just isn’t going to happen. There is a global demand for domains that has resulted in a consistent growth of between 4-6% per year for many years. The bigger risk here is if domain investors find there isn’t a business model for the extensions and begin dropping them. Remember over 50% of the ngTLD’s are parked…..this is like a ticking time bomb for many registries who are desperately searching for real end users to adopt their extensions.

In my opinion, Rightside is very bullish about the ngTLD market. In the long-term things may playout as the general population adopts the new extensions but this is not going to happen in the space of just over 2 years.

The good news for Rightside is they received $76.7m of working capital (approx.) and this paid off debt and some is being applied to a share buy-back plan (more on this later). The CEO, Taryn Naidu, also indicated they now had a war-chest for a few small acquisitions.

But what did they really sell in divesting Enom? In addition to the 14.5m domains (as of May 2015), Enom also had 28,000 resellers which provided a valuable cashflow as well as a large expiry stream of domains. It also means the company’s EBITA without Enom change from a $6.4m profit to a $5.1m loss for the unaudited 9 month ended 30the Sept 2016 figures. This isn’t a big issue as long as you believe in the ngTLDs registry story.

What concerns me about the sale is the power in the domain supply chain clearly resides in being the company that has the customer relationship. Godaddy has proved that once you scale you can wield a big stick over the registries and demand extortionate terms because you have access to the customers.

Rightside has retained name.com with 1.8m domains under management from 230,000 customers but this is a drop in the ocean compared to its larger competitors. It’s not big enough to be a contender and it’s not small enough to just let die…..it’s right in the middle.

A positive about the Rightside direction is the large margins in a registry. If these can be defended (and this is debatable) then it may have made sense to divest a low margin registrar business. Some of the war chest may get consumed in the time it takes for the ngTLDs to be adopted but that’s not necessarily a big issue. The question still remains about how long the adoption will really take.

The war chest is perfectly timed in providing Rightside with the cash to be a part of the consolidation of the ngTLD market. The challenge will be despite the millions in the bank they are still the smaller player in the registry place and will find themselves up against others with deeper pockets. I can see some very smart wheeling and dealing will need to be made to get deals across the line…..this is where being public may have its advantages.

In my last few articles on RIghtside I keep on coming back to the fundamental problem of a listed tech company. Where’s the sizzle? The fundamental challenge for the business is to migrate investors into trading on capital growth rather than dividends.

This means spending a chunk of the cash from the Enom sale on a share buy-back was a complete waste of resources. You may get a blip in the share price but not much more.

As can be seen from the above stock chart the company is essentially flat and not that interesting for capital growth. You can play in the margins and make a few dollars on the way through but what is required is a change in the trend.

Changing the trajectory of the share price is a herculean task that will require Rightside to develop or acquire some ground-breaking tech for the domain space. It’s less about another deal and more about innovation.

The question that really needs to be asked is whether Rightside’s culture fosters creativity or are such individuals squeezed out? Is risk taking rewarded or punished? How difficult is it to get approval to test a new idea? All these questions ultimately lead to breakthroughs that will provide the sizzle that will make Rightside accelerate past its competitors.

Despite my apparent negativity about the Enom sale it’s a bold move and the fact that the business was able to make such a big decision is good news! As a bell-weather of the domain industry, I’m waiting and hoping that Rightside can pull off a transformation and send the company into the wild blue sky. Only time will tell….

As with any investment I would encourage readers to seek their own professional advice.