News from 2014

CentralNic’s (LON:CNIC) investment proposition is a compelling and very easy one to understand; it’s the abbreviations and unfamiliar language used in this specialist area of the internet that tend to muddy the water.

Chief executive Ben Crawford describes his business as a “cash collection and domain name powering machine”.

This still probably doesn’t mean much to those unfamiliar with the process of allocating domain names – the string of letters and words used to find or identify a website.

Simply put, you need infrastructure to assign, sell and market these names, and over 20 years CentralNic has developed an impressive network.

It is a registry for names as well as having strong links with the retailers (registrars), the biggest of which is GoDaddy.

In fact, CentralNic, which listed on AIM in September and raised £5mln, is integrated with over 80% of all domain retailers in the world.

The importance of this will become apparent later when we discuss the opportunity it has to grow its revenues and profits over the next few years.

Yes, unusually for a UK internet company, it does make money, though, admittedly, not a lot at present.

Those funds are generated from the sale of domain names using second level domain name extensions (SLDs). These are one down from the top level domain names such as .COM, .INFO and .NET, but still include the .COM suffix.

It sounds confusing, I know; but it’s simple when spelled out.

CentralNic has 18 SLDs, including .UK.COM and .US.COM, which are in competition with the country code system that gives .CO.UK, or .DE (Germany) and .CA (Canada). So for example Avon uses the CentralNic-supplied domain name avon.uk.com for its website, and Activia uses activia.us.com, also from CentralNic.

Additionally, in a smart deal with the Laos government, it has taken the .LA code and re-sells it as the identifier for Los Angeles.

The initiative is being supported by the marketing muscle of GoDaddy.

The propellant for sales and earnings going forward will be some far reaching changes to the current way internet names are allocated.

Up until recently there were only 22 generic top level domains (gTLDs), including .COM.

Over the coming years, however, up to 1,300 more could become available; some have already launched and many more are expected soon.

They range from city names, including .LONDON and .NYC, to the more niche .BAR, .COLLEGE, or .WEBSITE.

When the first wave of domain names were issued from the late-1980s onwards it was a free-for-all.

Some very savvy speculators nabbed the .COM names for certain big brand owners and auctioned them back.

Others made a mint by acquiring domains names and flipping them on. So, for instance, SEX.COM sold for US$14mln and CANDY.COM made US$3mln. (In fact CentralNic’s portfolio of .com domain names such as us.com and uk.com is valued by its management at over $50 million.)

This time around brand owners and cities have an automatic right to their name.

The remainder of the list has been opened to applicants approved by the industry body ICANN.

Some names have been allocated uncontested, others have required a little horse trading to secure, while a number of the really popular top level domains have gone to auction.

Firms such as fellow AIM-lister Minds + Machines and an American outfit called Donuts have raised funds to bid for selected domain names. Unsurprisingly, the 600 pound gorillas of the worldwide web, Google and Amazon, are also heavily involved with the auction process.

CentralNic is taking a very different tack. It is teaming up with the individual entrepreneurs and blue-chip companies who are bidding, rather than spending its own money.

It will offer the backbone needed to market, sell and collect cash for the new domain names in return for a share of the revenues.

In other words, CentralNic will give its partners access to those 1,500 websites and 100,000 or so resellers that make up 83% of the retail market.

This requires far less investment than acquiring generic top level domains directly.

“The idea is we provide the technical platform and the cash collection function that underpins our partners’ business model and they fund the business and launch it. So we are on a revenues share,” explains Crawford.

“We aren’t taking on any risk, or the cost of doing global launches.”

Available via CentralNic are 15 generic top level domain names, the latest addition to the family being .INK, which will appeal to tattooists.

There’s also .BAR, .COLLEGE, .WIKI and .XYZ.

The latter is owned by Daniel Negari, the 28-year-old multi-millionaire rising star of the internet.

“He is one of the biggest domain name traders on the secondary market already,” says Crawford.

“Daniel’s idea for .XYZ is very simple. It is the new .COM.

“This is the most generic domain for the new generation who want to build a website and who find all the good names have been taken by the last generation.”

While it was thought prior to IPO the group might be lucky to sign up 25 gTLDs, companies and entrepreneurs working with CentralNic have already secured 29, and are in the running for a further 30.

As the business is profitable, every domain name sold is adding to the bottom line, says Crawford.

The potential earnings uplift was outlined by Zeus Capital in a recent note to clients.

It is predicting that gross revenues will rise from a forecast £3.9mln for 2013 to £11.3mln this year, and hitting £19.1mln by 2016.

That will see underlying earnings (EBITDA) advancing from £800,000 to £4.1mln in that short period.

More to the point the enterprise-value-to-EBITDA multiple drops from 42 times to a more realistic and reasonable 6.8 times.

“Any investment professional who studies quality of earnings will enjoy reviewing the investment case of CentralNic,” adds Zeus analyst John Wilson.

“Not many companies create stock, sell it and get paid for it in the same nanosecond.”