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Activist investor says eNom was sold too cheap

Kevin Murphy, February 20, 2017, Domain Registries

J Carlo Cannell, the activist investor who has been circling Rightside for the last year or so, was unimpressed with the company’s recent sale of eNom to Tucows.

In a letter published as a Securities and Exchange Commission filing last week, Cannell announced that he has started up a support group for fellow “concerned” investors.

In the distinctly loveless Valentine’s Day missive, Cannell called for Rightside to be acquired, go private or issue a big dividend to investors, and said he intends to campaign to have the board of directors replaced.

On the eNom sale, Cannell wrote that the $76.7 million deal “marks a step in the right direction” for the company, but that he was “not satisfied” with the price or the $4 million legal fees accrued. He wrote:

Conversations with management suggest that the Company took only two months to evaluate and close the transaction. Perhaps if they had been more patient and diligent, shareholders would have enjoyed more than the 0.5x 2016 revenues which they received in this “shotgun sale”.

This price was a fraction of Tucows’ own valuation of 2.6x 2016 estimated revenue. For the two trading sessions following the eNom transaction, NAME traded up 10% while TCX was up 32%, suggesting that investors believe it was a better deal for TCX shareholders than NAME shareholders.

The deal was described at the time by Tucows’ CEO Elliot Noss as an “individual opportunistic transaction”.

Noss later told analysts that the eNom business was floundering, “a flat, potentially even slightly negative-growth business”.

Cannell said last week he has formed Save NAME Group, named after Rightside’s ticker symbol, as a means to exert pressure on the board.

He said it is currently “difficult to justify” the company remaining publicly listed, and that the “sale of the entire company” or a “special and substantial dividend” could help appease shareholders.

He said Rightside agreed last August to let him name a new director, but has dragged its feet approving his suggestion, adding:

SNG intends to become more active and vocal in its efforts to force change at NAME. SNG has compiled a slate of qualified candidates. The names and identity of these candidates shall be disclosed periodically together with other neutral and reliable facts to support the contention of SNG that some or all of the board of NAME needs to be replaced.

Cannell, who owns about 9% of Rightside, first emerged as a critic of the company a year ago.

At that time, he called for the company to ditch its “garbage” new gTLD registries in favor of a focus on its higher-margin eNom business.

He was supported by Uniregistry CEO Frank Schilling, then also a Rightside investor in addition to a competitor.

Rightside sells eNom to Tucows for $83.5m

Kevin Murphy, January 23, 2017, Domain Registrars

Tucows is to become “the second largest registrar in the world” by acquiring eNom from Rightside, paying $83.5 million.

The deal will give Tucows another 14.5 million domains under management and 28,000 resellers, giving it a total of 29 million DUM and 40,000 resellers.

That DUM number, which appears to include ccTLDs, makes Tucows the undisputed volume leader in the reseller world and the second-largest registrar overall.

GoDaddy, the DUM leader, had about 55 million domains just in gTLDs at the last count.

Tucows CEO Elliot Noss told analysts that the deal, along with the April 2016 acquisition of Melbourne IT’s reseller business, were “individual opportunistic transactions”.

He said that Tucows will take its time integrating the two companies, but expects to realize cost savings (presumably read: job losses as duplicate administrative positions are eliminated) over 24 months.

The reseller APIs will not change, and Tucows will not migrate names over to its own existing ICANN accreditations. This could help with reseller retention.

For Rightside, the company said the spin-off will allow it to focus on vertical integration between its gTLD registry business and its consumer-facing registrar, Name.com.

Rightside had come in for a certain amount of high-profile investor criticism for its dogged focus on new gTLDs at the expense of its eNom and Name.com businesses.

Activist investor J Carlo Cannell, supported by fellow investor and Uniregistry CEO Frank Schilling, a year ago accused Rightside of putting too much emphasis on “garbage” new gTLDs instead of its more profitable registrar businesses.

Since then, Rightside has rebuffed separate offers for some or all of its gTLDs by rivals Donuts and XYZ.com.

Last June, it also announced plans to modernize eNom, which Cannell and others had accused of looking stale compared to its competitors.

Rightside refuses Donuts’ “opportunistic” $70m gTLD offer

Rightside has rebuffed Donuts’ semi-hostile takeover attempt for its portfolio of gTLD registry contracts.

The question now is: will Donuts up the offer from the $70 million already on the table?

In a pre-markets statement today, Rightside said the offer “undervalued” the assets.

CEO Taryn Naidu is quoted as saying:

After thoughtful evaluation, Rightside’s Board has determined that Donuts’ proposal significantly undervalues Rightside’s Registry assets. We believe Donuts’ proposal is an opportunistic attempt to acquire Rightside’s valuable portfolio of domain extensions with an undervalued price and in a manner that would not be in the best interests of Rightside shareholders.

The company reckons its gTLDs will be bringing in $50 million to $75 million in revenue a year in the next three two five years, which would represent substantial growth over current levels.

It made $2.6 million from the registry business in the first quarter this year.

Donuts’ offer could be considered “opportunistic” given that there’s some shareholder dissatisfaction with Rightside’s success rate with new gTLDs today.

Activist investor J Carlo Cannell and Uniregistry CEO Frank Schilling, both of whom own small but significant chunks of Rightside, have called on the company to get rid of some of its under-performers.

By announcing the offer publicly — apparently after months of private offers — Donuts might have been trying to capitalize on this unrest.

But pissed-off investors don’t necessarily want these gTLDs sold off cheap.

Rightside has 40 new gTLDs. A $70 million offer equals $1.75 million per gTLD. That’s fair way below the average sale price for gTLDs at ICANN auction, which is $7 million (or $3 million if you take the median).

Will Donuts now increase its offer, or back away?

Rightside to modernize eNom, predicts $75m new gTLD revs

Rightside used its first quarter earnings call yesterday to address, albeit indirectly, some of the criticisms recently leveled at it by activist investors and competitors.

CEO Taryn Naidu revealed for the first time how the company sees the new gTLD market playing out in the longer term.

He said than in three to five years, Rightside expects annual revenue from its registry business to come it at $50 million to $75 million.

That’s a hell of a lot more than it makes today.

In the first quarter, registry revenue was $2.6 million, compared to $1.6 million a year ago. Annualized, that’s a shade over $10 million.

On the back of an envelope, Rightside seems to need roughly 50% growth per year over five years to hit the low end of its target.

Naidu told analysts that one factor built into this projection is that third-party registrars will start to sell just as many new gTLD domains as Rightside’s registrars do.

Currently, Rightside sees 15% to 20% new gTLD, but with others it’s 3% to 5%, he said.

Naidu said he expects margins to be 20% at the EBITDA level.

The revelation of these targets may go some way to address investor concerns that Rightside is putting too much effort into its new gTLD business at the expense of its cash-generating registrars.

J Carlo Cannell of Cannell Capital expressed these views and others in March, and was supported by fellow investor Frank Schilling, CEO of Uniregistry.

Naidu last night also addressed concerns about eNom, which Cannell had called a “time capsule” due to its aging user experience.

He admitted that eNom is “encumbered by some older technology” but said it was being fixed.

“Later this quarter we will be rolling out the first phase of our development efforts, which include a dramatically revamped user interface, a new suite of software development tools and a new developer hub to help our partners learn, develop and test faster,” he said.

The registrar business brought in $44 million in the quarter, up from $41.9 million. Aftermarket revenue was $9.3 million compared to $7.3 million.

Overall, revenue was up 9% at $55.1 million, with a net loss of $5.1 million. That compared to income of $1.9 million a year ago.

Naidu also seemed to obliquely address the criticism that a lot of Rightside’s new gTLDs are shit — .democrat, .dance, .army, .navy, and .airforce have been singled out by Cannell and others — by talking about how the company doesn’t necessarily put the same amount of effort into marketing its whole stable.

Some gTLDs will be marketed more heavily later, he said, comparing it to a real estate owner holding on to parcels of land for later development.

Naidu also talked up Rightside’s prospects in China, where apparently .pub is doing quite well because registrants think it means “public” rather than “drinking establishment”.

Rightside rejects Negari’s $5m new gTLD offer

Rightside has turned down Daniel Negari’s $5 million offer to acquire four of its new gTLDs, according to Negari.

The XYZ.com CEO told DI via email tonight:

I was looking forward to operating .Army, .Dance, .Dentist, and .Vet under the XYZ umbrella. I’m disappointed that Rightside didn’t entertain my offer, especially since I believe $5MM was more than fair. I believe these and other new TLDs are worth more to me than any other registry operator due to my growing enterprise. However, it’s understandable for Rightside to want to monetize on these assets.

Rightside has told him it had reviewed the offer and was not interested, he said.

The offer was made in a March 30 open letter to the company and Securities and Exchange Commission filing and expired last night, April 7.

There was some speculation about whether it was a genuine offer, just an attempt to boost Rightside’s share price, or both.

Negari and his COO, Mike Ambrose, own about 5% of Rightside between them, following an $8.5 million investment.

Rightside’s ability to grow revenue from its new gTLD portfolio has become the focus of attention due to the intervention of activist investor J Carlo Cannell of Cannell Capital, who reckons the company is paying too much attention to rubbish TLDs at the expense of its profitable registrar businesses.

Negari thinks he would be able to grow .army, .dance, .dentist, and .vet.

The largest of those gTLDs is .vet, with about 5,200 names in its zone file. It grew by 794 names in the last 90 days.

The other three are below 3,000 names, and are either shrinking or adding fewer than 10 names per day.

XYZ.com’s second-tier portfolio strings, such as .college, .rent and .theatre, are faring a little better, at least in terms of growth. But they are a little younger, and none are over 10,000 names.

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