Description

Investment Highlights

• Having sold the eNom registrar business, pro forma net cash on the balance sheet is $83m, $4.30/share

• Conservative sum of the parts value of $8.70:  net cash, registry business, registrar, domain portfolio

• Registry business is a rapidly-growing, high-margin jewel– a Verisign to new top level domains (TLDs)

• EBITDA is neutral for 2017 but incremental registry margins are very high – targeting $40m EBITDA in 3-5 years

• Minimal downside risk given sum of parts value with enormous upside potential – at the Company’s EBITDA target, Rightside’s valuation is $25 per share

Company Overview

Seattle, Washington-based Rightside Group is a domain name registry and registrar with pro forma 2016 Revenue / EBITDA of $60 million and negative $7 million.  Cost reduction efforts of $3-$5 million, along with some revenue growth, should bring EBITDA to breakeven in 2017.  Rightside is historically a domain name registrar, but has been very active in ICANN’s auctioning off of new TLDs and has acquired 40 different TLDs over the past 5 years (top five are .news, .live, .rocks, .pub, and .ninja). As the owner/administrator/registry of these TLDs, Rightside sells and annually renews these domain names to interested users for an annual fee.

Verisign is the largest registry in the world and operates the .com, .net and more recently the .web TLD. Neustar has a registry business as well and owns the .us, .biz, and .co TLD’s.  Google owns the .app TLD.  In total, ICANN has auctioned off 500 TLDs.  The users of these new TLDs range from speculators to large brands that want to maintain ownership of their brand name under any new TLD to actual users (i.e. switchboard.live, tmobile.news, etc.).

This is a new industry and it’s difficult to determine how successful any given TLD will be.  Our thesis here is pretty simple - very minimal downside risk given the sum of the parts value and massive upside at the company’s target with still excellent upside if the company reaches just half of its target revenues.  While Rightside does spend marketing dollars to advertise its new TLDs, it isn’t unreasonable to think that the registry business could ultimately operate at 70% EBITDA margins (Verisign operates at 70% EBITDA margins).  

Rightside was spun-out of Demand Media (DMD) in August 2014.  Private Equity firm Oak Investment Partners owns 23.1% of the company and has board representation while activist investor Cannell Capital owns 8.6% of the company.

Business Segments

Rightside operates in the following three segments:

Rightside Registry -

• Portfolio of 40 owned top level domains, the most popular of which is .news (75,000 registered .news domains)

• 2016 revenue ~$12m. We expect 2017 revenue of $15-$16m. Targeting $50-$75m revenue in 3-5 years is about a 40% CAGR

• Growth will be driven by: more active marketing of new TLDs by domain registrars and approval to operate as a registry in China (12% of Q3 Verisign revenue was derived in China but is up 62% from last year)

• Gross margins are 90% and over time EBITDA margins should approach 70%

• The 40 TLDs were obtained in recent ICANN auctions at an all in price of only $17 million

• As of 9/30/16:  546,000 domains under management at an average revenue per domain of ~$22

• Revenue has grown significantly from $1.9m in 2014 to $8.4mm in 2015 to around $12m expected in 2016

• Rightside also owns and operates a registry backend platform, which in addition to powering its own registries also powers registries for 200 other different TLDs.

Name.com -

• Retail registrar, about $28-$30m revenue annually

• Similar to godaddy and web.com – sells domain names and value added services to small businesses (i.e. email, hosting, etc.)

• 1.8 million domains under management at ~$15 ARPD ($15 ARPD includes value added services)
  

Rightside Aftermarket -

• Rightside buys expired domains on name.com that it believes has value, portfolio of 250,000 domains

• Revenue of ~$22m annually generated through domain sales and advertising (i.e. parking) revenue

The gem here is the Registry business which is expected to organically grow to $50-$75m in revenue over the next 3-5 years – virtually all of this incremental revenue ought to flow down to the EBITDA line. A sum of the parts valuation would look something like this:

• Cash - $83m (net of $23m in debt and $13m of net deferred revenue) - $4.30/Share

• Registry business – Donuts LTD offered $70m for this business in June 2016.  Verisign trades for 7.5 times revenue.  A 4x multiple on $15m of 2017 revenue would be $60m - $3.10/share

• Name.com registrar and the aftermarket business – at half of $50m in annual revenue, about $25 million - $1.30 per share

Our sum of the parts valuation is very conservative. There are likely multiple buyers for each of these businesses who would almost certainly operate them far more profitably than Rightside is currently (Tucows purchase of eNom for 0.5 times revenue looks to us like it was ~40% accretive to Tucows EPS).

The obvious risk here is misallocation of the company’s substantial cash balance.  While that is certainly possible, the track record here does not suggest poor capital allocation with the current TLD portfolio having been acquired for only $17 million, with eNom having been sold at $83.5m, and with the presence of private equity investor Oak Investment Partners and activist Cannell Capital.

Valuation

$40m EBITDA 4 years out at 10x with $100m in cash and 20m shares out would bring $25 per share.  Even at $20m EBITDA and a 10x with $80m of cash would bring $14 – almost a double from today.

Catalyst

Continued growth in the registry business

Potential sale of the company