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According to some estimates, up to 17% of Internet traffic is "direct navigation", ie. Internet users typing a word directly into the URL bar of their browser. This has led to the creation of the parked domain name business, where URLs are purchased solely for the purpose of displaying pay-per-click ads. Tucows (TCX), the third or fourth largest domain name registrar, is now moving into this business by purchasing domain names when they expire. Comments from CEO Elliot Noss on his May 4th conference call (excerpted from the full Tucows transcript):

Elliot Noss

Another area of our business that has exceeded expectations is our recently launched expired domains business. This is a very dynamic space that has undergone radical change over the last 12 to 24 months, and which we expect will continue to change in the next 12 to 24 months.

Again this week, we saw another significant pool of institutional capital enter this market. By our count, the fourth such pool of capital in the last 12 to 18 months. While the dynamic nature of the space makes our expired names business difficult to predict, I think it is safe to say that a lot of our initial assumptions about both service provider and end user responses to the way that we are approaching the market have been borne out. Our expectations in terms of both ramp-up of transactions and financial results have been met and even exceeded.

In terms of expired domain names, revenue is generated from two separate sources: parked pages or pay-per-click revenue and sales of secondary domain names. Now, those sales might be by way of auction or by way of an integrated marketplace for the sale of domain names.

The revenue from the sale of secondary market domain names will be categorized with Other Internet Services in our financials. We are categorizing pay-per-click revenue with revenue from our content business. You will see this revenue on our income statement in the Advertising and Other revenue line.

The rationale for this is that the internal drivers for parked pages and content revenue are the same: user sessions, unique users and searches. The external drivers are also the same: growth in Internet advertising. Financially, they perform very similarly in that they are both extremely high margin businesses. To be clear, we are not trying to obscure what is going on in our content business, and we will continue to provide some visibility into this going forward.

I note that in the current quarter, we are starting to see some of the fruits of our labor from the changes that we have made over time to that content business. It is also important to note that with parked pages revenue, there are increasing returns to scale. By that, I mean what is typical in this type of business is that as your level of business gets higher, your revenue share from your supplier of leads gets better. So not only will this revenue stream grow in its own right, but as it grows, the returns will also improve.

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Thanos Moschopoulos - BMO Nesbitt Burns

The expired names business sounds like it’s off to a good launch. Could you provide any metrics specifically? Or is it a bit early to do that at this point?

Elliot Noss

Yes, we are playing around with and we’re talking internally about what the right metrics are. I think that the pieces of the business are still coming into sharper relief.

A great example of that is if you were to ask me right now, two years from now, where do I think our greatest contributions will come in terms of selling expired names, I think that will be on the agency side. But we could, in fact, find that is in the primary inventory that we are piling up for ourselves. On the pay-per-click side, should we be talking about revenue or users or sessions, et cetera?

So it is something we’re thinking about. Happy to take any input and any thoughts you might have. We’ll point out that what we have seen as metrics in this business, when we see deals shopped on The Street or we see some of the discussion that goes on, tend to be what I would call classic content business metrics. Based on our experience in the content business, some of it we don’t think apply.

I’ll give you a great example there, which is unique users. Unique users in the content business, if you’re Yahoo!, that is a very material concept and is going to be some small number compared to your total page views. In parked pages it’s almost a 1:1 ratio. So what is the right way to judge it? We’re still playing with all of that.

I must also tell you that we have to play with that in the context of the whole book of business growing quite aggressively. So what is the organic growth inside of that? It’s complicated.

Thanos Moschopoulos - BMO Nesbitt Burns

Any thoughts on the acquisition of eNom earlier in the week? Would that have any implications on you guys or on the landscape?

Elliot Noss

Well, I think there are two things that we think are clear implications there. One, you know, that was specifically the additional pool of capital that I was referring to coming into the space. I think certainly any time that very credible institutional players put a large bet on the table — this is, again, the fourth nine-figure bet as far as we look at it that has been placed in the space. That is a real validation of this as a real market space with some long-term potential.

We think the second implication there is that eNom is a company that we have always competed with, to some extent, in that core wholesale business. We can’t read that there’s anything but a signaling of them moving somewhat away from that business.

In other words, all of the messaging that we have seen externally referenced as the secondary market and pay-per-click and content and building out of content; that is clearly not about supplying in relationship with web hosting companies and ISPs.

So that bodes well. We think it’s perhaps one less rod fishing in our pond.

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David Shore - Desjardins Securities

Thanks. Hi, guys. Can you give us some of the stats around the domain names under management?

Elliot Noss

Yes, sure.

Mike Cooperman

The number of domain names under management at the end of the first quarter is 5.1 million, Dave.

Full disclosure: long TCX at the time of writing. I may close out the position at any time without notice.

Source: Tucows Discusses Domain Name Parking (TCX)