Rightside Group Limited (NASDAQ:NAME) Q3 2016 Earnings Conference Call November 8, 2016 4:30 PM ET
Brinlea Johnson - The Blueshirt Group
Taryn Naidu - CEO
Tracy Knox - CFO
Sameet Sinha - B. Riley & Company
Good day, ladies and gentlemen, and welcome to the Rightside Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference, Ms. Brinlea Johnson of The Blueshirt Group. You may begin.
Good afternoon. Before we begin, during the course of today's conference call, management will make forward-looking statements regarding Rightside's financial performance and future events, including beliefs about the growth and expansion of the domain name services industry and gTLDs in particular, future revenue and margins, and the Company's ability to successfully market and sell its new gTLD.
We caution you to consider the important Risk Factors that could cause the Company's actual results to differ materially from those in the forward-looking statements made in the press release and on this conference call. These Risk Factors are described in our press release, and are more fully detailed under the caption Risk Factors in Rightside's most recently filed quarterly report on Form 10-Q and its other filings with the SEC.
In addition, please note that the date of this conference call is November 08, 2016, and any forward-looking statements that we make today are based on the assumptions as of this date. We undertake no obligation to update these statements as a result of new information or future events.
With that, I'd like to turn the call over to Taryn Naidu, CEO of Rightside.
Thanks, Brinlea. Welcome to our shareholders, other investors, and analysts joining our call today. In Q3, Rightside executed on our strategy to drive strong growth in our high margin business, while optimizing for margin expansions throughout the business.
Revenue for our new gTLD registry grew 26% year-over-year on the back of strong premium name sales and Name.com, our flagship retail registrar grew at 14% year-over-year. Rightside delivered adjusted EBITDA of $2.3 million, rising more than 2 times on a year-over-year basis, as we continue to capitalize on the opportunity provided by new generic top level domains. Overall, revenue was $53 million, slightly down from Q3 last year as a result of our lower margin third-party syndication partners facing headwind.
As I shared on our previous earnings calls, we are focusing our investments in 2016 on the following three strategic initiatives; number one, growing awareness and demand for new gTLDs; two, expanding distribution and sell-through for our registry; and three, growing revenue for our retail registrar. I'd like to walk you through the significant progress we are making in each of these areas.
First, we executed very well on our ability to grow awareness for new gTLDs. One of our largest marketing efforts in Q3 was the successful launch of our .GAMES in gTLD. Even before they go live, our early marketing and business development activities with brand registrars lead to our most successful sunrise period from a cash revenue perspective, as 100s of companies like, Nintendo, Electronic Arts, and Activision Blizzard came on board. Since then numerous gaming industry article placements and eventual cases have held drive more than 7,000 registrations and over 300,000 in cash revenue per premium domain related sales, including high value names like free.games, math.games and racing.games.
With the .GAMES launched and the subsequent of uptick chasing ahead of our expectations, we’re enthusiastic about the potential for our latest new gTLD. .LIVE was also in the marketing spotlight in Q3, as we continue to roll-out our marketing awareness programs. The need for content creators to develop their brand and audience around an online address that is platform agnostic and under their control is resonating in the market. This message was strongly reinforced when Twitter recently announced their shutdown of Vine, leaving behind many creators who have invested heavily in developing an audience in a location that is now have operated.
We have developed a program to recruit highly visible live-streaming creators to be advocates for .LIVE. We now have many of these influences, helping us to promote the value of .LIVE on a grassroots level to a very receptive audience at industry events and in their live broadcast.
In just two weeks ago, we launched the Web site Be.LIVE, a gathering place that features tips and content from popular live streamers to help creators amplify their live efforts and attract audiences. Our .LIVE new gTLD now has about 70,000 registered addresses and continues to rapidly grow, thanks to its strong appeal and the effect of marketing efforts of our team.
Moving on to our second strategic initiative, expanding distribution in sell-through for our registry business. In Q3, our channel team focused on expanding our distribution footprint and sell-through in China, forging deeper relationships with registrars around premium names and helping registrar partners better merchandize new gTLDs to their end users.
In China, our leg worth in the country is really starting to pay-off. We now have a total of 19 registrars signed-up to distribute one or more Rightside new gTLDs. Dispositions as well as the capitalized on new demand that we expect to emerge when China's Ministry of Industry have Information Technology confers full certification upon our registry, and end users can actively deploy their debates.
Our relationship with Alibaba’s local registrar HiChina is growing deeper. We are the first registry with who they have integrated premium demands into their purchase flows. And in a market people have historically thought would never support anything but rock bottom price points. Together, we are proving them wrong. Despite carrying a small number of Rightside new gTLDs, only one-third party registrars sold more of our premium names than Alibaba in the quarter. Alibaba has now taken things up another notch by integrating platinum premium domains, our most valuable and highest priced inventory. And last month, we were invited to exhibit at the Alibaba event, which gave our team a chance to interact directly with their customers and business partners.
Staying on the topic of premium domain names for a minute, our past revenue performance for these names had another all-time high in this quarter. We continue to close six figure sales on a regular basis, and are excited about the websites being rolled out on many of these high value names like, homes.forsale and SEO.consulting. Lastly, an important development in our registry distribution efforts is beginning to take shape, around the new technology offering that is helping our registrar and retailer partners that were merchandizing new gTLD inventory to their customers.
We’ve begun to roll-out a domain suggestion service, DSS, that provides highly relevant answers to customer search queries for domain names. Built upon a sophisticated engine we developed for use by our owned and operated registrar, our DSS can help rapidly advance the ability of the registrars to contextually offer up the best name options from hundreds of new gTLD.
We’ve rolled out DSS to our first few partners, and have an impressive list of additional companies who are interested in moving forward. We think better domain discovery and merchandizing is the missing link of the new gTLD adoption curve, and believe it can be an important advancement for both Rightside and the new gTLD community at large, while also helping us build stronger relationships with our partners.
And finally, let’s turn to our strategic initiatives to grow revenue for our retail registrar, where we had some great spots and also some challenges in Q3. GAAP revenue for Name.com grew at a healthy 14%. This was a reduction from previous growth rates as a result of fewer new gTLD launches. We’re working to drive that revenue number back towards the 20% as we shift our focus from new gTLD launches to merchandizing the available inventory. The eNom portion of our retail business picked up momentum on the back of our investments. Our rework to consumer experience we rolled out in June has led to increases in site visits from organic search, better conversion rates, and higher value added service attach rates.
We also recently rolled out integration with Google’s G Suite offering that is off to a good start. In the third quarter, eNom’s retail business outpaced our expectations for both cash revenue and gross profit. From a margin expansion perspective, eNom turned in a great quarter as business optimization we’ve been making on both the retail and wholesale areas led to a 2.7% year-over-year improvement in direct profit on a cash basis.
In summary, Rightside has been focused on capitalizing on the growth of the new gTLDs, which starts with our world-class registry business and great distribution partners. We’ve lead the charge in the industry in many innovative ways, including marketing and merchandizing of domain names with products like our premium domains and domain suggestion service.
We continue to have success increasing profitability in our legacy businesses through cost saving initiatives, as well as price optimizations. Through our initial roll-out of these initiatives, we’ve achieved many product improvements, and at the increased margins with minimal impact on customer retention.
Rightside is making substantial progress towards our long range targets in the next three to five years of $50 million to $75 million in annualized revenue for our registry business, as well as 20% adjusted EBITDA margin across our whole business.
I will now turn it over to our CFO, Tracy Knox. Tracy?
Thanks, Taryn. I'll begin today by providing an overview of our financial results for the third quarter ended September 30, 2016, followed by the key metrics. Starting with revenue, total revenue in the third quarter was $53.3 million. Our registrar services revenue increased to $44.8 million, inclusive of approximately 14% growth at Name.com.
The majority of the total registrar services revenue growth was driven by our profitability initiatives and new gTLDs registrations, which have an average selling price of approximately 2 to 3 times that of legacy gTLDs. Our registry services revenue increased 26% to $3 million as we recognized revenue on a growing base of domains registered on our own and operated gTLD. Aftermarket and other revenue declined to $6.3 million. While we continue to see strong domain sales, revenue was impacted by a reduction from lower margin third-party syndication partners. We expect this trend to continue through Q4.
For the third quarter of 2016, cost of revenue decreased to $40.4 million. As a percentage of revenue, cost of revenue decreased from 77% of revenue to 76%, primarily due to the increasing mix of higher margin registry services revenue. As a reminder, the benefit of our pricing optimizations launched in Q2 of this year, will first be realized in cash margins and then amortized into GAAP margins overtime. Importantly, in Q3, the cash margin for our registrar business started demonstrating the benefit of our pricing and profitability initiatives with cash direct profit margins for this business increasing approximately 100 basis-points on a year-over-year basis.
Sales and marketing expenses increased slightly in the third quarter to $2.7 million. The increase was primarily the result of marketing efforts to drive awareness in education about new gTLDs. Technology and development expenses in the third quarter decreased to 15% to $4.6 million. This was in large part due to our success in reducing infrastructure and technology costs to support our platform.
General and administrative expenses in the third quarter increased 4% to $5.4 million. The increase was primarily related to professional services expenses. In the near-term, we expect our operating expenses to remain relatively flat. In the third quarter, we reported a net loss to $4.4 million or $0.23 per share. This compares to $3.4 million in the prior year period, which includes $1.7 million gain on other assets.
Adjusted EBITDA for the third quarter was $2.3 million, over 2x the prior year period, as we've continued to grow our mix of higher margin registry services revenue, and started to realize the benefit of our profitability initiatives.
Now, I'll move on to our key metrics. End of period registry domains totaled approximately $546,000, up over 55% year-over-year. End of period registrar domains totaled $16.2 million. Average registrar services revenue per domain increased to $11.04 compared to $10.81, primarily due to our profitability initiatives, as well as an increasing mix of new gTLD domain registrations, which had a higher average selling price. Finally, the registrar renewal rate for the third quarter was 73%. Onto liquidity and capital resources, as of September 30, 2016, our cash and cash equivalent increased was approximately $47.3 million as compared to $47.8 million as of June 30, 2016.
At the end of quarter, we had letters of credit totaling $11 million outstanding with approximately $19 million of available borrowing capacity under our revolving credit facility. Subsequent to quarter end, we grew $12.8 million on our revolving credit facility, and yesterday, we fully repaid the aggregate outstanding principle balance of $27.4 million of our term loan credit facility.
For the full year ending December 31, 2016, we expect the following; total revenue to be around the lower end of the previous range of $218 million to $228 million, inclusive of the approximately $12 million of GAAP revenue from our registry services business; total adjusted EBITDA of $8 million to $11 million, as a result of margin optimization and effective cost management. In summary, as our results demonstrate, we continue to focus on driving growth and margin expansion throughout our business, and delivering shareholder value.
That concludes our prepared remarks. I will now turn the call back to the operator to take questions.
[Operator Instructions] Our first question comes from the line of Sameet Sinha with B. Riley. Your line is open.
I guess the first question relates to the gTLD revenue, which you’re indicating coming at the low end $12 million to $15 million. Can you talk about the dynamics there which led to this changes versus what you were seeing at the beginning of the year, whether it’s pricing volume, or any distribution deals that have been pushed out? Secondly, if you could talk about the re-launched eHow that you had spoken about over the last earnings call, talking about that, what the benefits you’re seeing from that re-launch. And if you can also in that same context talk about, your technology costs. Should we expect that to stabilize in the near future, so as you’ve done with that launch? And then I have a follow up question.
So, let me start with the gTLD revenues. So there have been a couple of things that changed at the beginning of the year. So, I think number one, we were expecting to see the merchandizing improvements from the channel partners kick-in in the back half of the year, a little bit more aggressively. And so I think we’ve said that earlier that we fully expect that the channel is going to be embracing it. And what we found is there has been a technical problem, where there’re struggling to able to figure out how to merchandize the right TLD’s. And so that’s why we’re launching product like our domain suggestion service to help fill that void. So, a Name.com, we’re still seeing over 15% of all new registrations been new TLD’s, and a lot of our partners are still in that 5%. And this is a technical problem, that I think they’re encountering and not a philosophical one. And so, we’re hoping to help bridge that gap with products like our domain suggestion service.
In other area that we’re defiantly focused on is, we shifted a little bit more of our marketing activities towards the channel. And as we did that, we anticipated more marketing dollars. And what we’ve done is actually had a blend of marketing dollars and rebase for the channel, and so, when we have the rebase that actually impacts some of the revenue growth. And the third area is China. We’re anticipating getting into the full license in China in Q4. We’re hopeful that that would come a little bit earlier. And we think there is a large opportunity in China once we become fully licensed.
And so for your second question on eNom, we’ve seen a lot of positive things over the eNom re-launch. I think first and foremost, operationally, we’ve rebuilt some of the technology to be able to run more efficiently and scalable on a lower infrastructure cost. So that’s been a huge benefit to us. Things that used to take us a week or two to actually get into production is now taking us hours. And so, we have a more flexible scalable platform. And from a business perspective, we’ve started to see a pretty good increase in our SEO traffic, our sell-through rate and our conversation rates, and attach rates of new products.
So we’re pretty optimistic about what we’ve done there and feel that we have a pretty big opportunity on the merchandizing of products and utilities to that eNom customer base.
And then hey Sameet its Tracy. On the tech and dev cost, we expect those costs to remain stable, on an absolute basis they should remain relatively flat.
Just one or two follow-up questions. So this technical issue that you pointed out with merchandizing, is that a technical issue as it relates to the communication between your platform and theirs? Or if you can just shed some more light on it, and how DSS would have overcome that technical issue?
Sure. So, the biggest challenge that people are finding is when a customer searches for a term or a domain name, they don’t know how to return relevant TLDs to their customer. So if you search for a domain that has some sort of legal intent, how do they understand that in real-time in return domains like, .legal, .attorney, .lawyer, et cetera. And so without having that mapping system or taxonomy built out to return relevant TLDs on a search. You’re effectively not giving your customers a good experience, and that's impacting the sell-through rate of new TLDs. And so what DSS does in real-time is it absorbs the query from the customer and returns relevant results based off of their exact match search term and relevant TLDs.
So the technical problem is not necessarily on how the two platforms talk to each other, it's just the problem at the registrar?
Yes, exactly. And this has been a technology staff that registrars have outsourced, mainly for the last 10 years. And so I mean it's a blend of our own science through as you can imagine, but we've focused, particularly in the last two years, on building of DSS for our own internal registrars. And we’re at the point right now that we’re doing such a good job in returning relevant results. We want to share that with the rest of the channel. We think that's one of the things that could really change the trajectory on sell-through rate.
Thank you [Operator Instructions]. And I'm showing no further questions, at this time. I'd like to turn the call back to management for closing remarks.
Thank you for joining our call today. And we look forward to keeping you updated on our progress.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone, have a wonderful day.