Minds + Machines today reported a 2015 loss of $10 million and further outlined its “transformative” restructuring and China strategy.
It’s the second full year of operating results M+M has posted since its first new gTLDs went live, and they’re not encouraging.
Revenue for accounting purposes was $6.3 million, but the cost of sales was $6.2 million, leaving gross profit of just $101,000.
Factoring in $12.1 million of operating expenses, a $7.9 million gain from losing new gTLD auctions, and other expenses, the total loss before tax was $10 million.
That’s compared to the $22 million profit M+M reported for 2014, a number entirely reliant on $33.7 million of auction loss payments.
The company also reported its “billings”, a line item that does not use the accounting method of deferring revenue across the life of a domain and is therefore more in line with incoming cash.
Billings for 2015 were $7.9 million, compared to $5 million in 2014. Gross profit under that measure was $1.7 million, but the $12 million of operating costs still made the company very unprofitable.
Ignoring the auction benefits in 2015, which will not last forever, it’s pretty clear that M+M was a company spending much more operating new gTLDs than it was making from them.
COO/CFO Michael Salazar said in a statement:
However, billings of $7.9 million for the year were simply not of a sufficient scale to cover the associated cost of sales ($6.2 million) and operating expenses ($12.2 million), which combined reached $18.4 million for 2015. Similarly, the $0.6 million savings achieved in the period by the decisions mid-year to stream-line the existing operational set-up were not of a magnitude to have any material impact in the year under review. That said, forfeited cost of sales and operational expenses as a result of the 2015 cost-cutting decisions will amount to $2.7 million in 2016
It’s perhaps little wonder that activist shareholders, apparently not prepared to play the long game, threw out half of the board and key senior executives during the period.
Former PR man Toby Hall took over as CEO in February, replacing co-founder Anthony Van Couvering, and announced earlier this month that M+M is dumping its registrar and back-end registry businesses.
Its registrar customers have been sold to Uniregistry, and it will outsource its registry back-end to Nominet, to save costs.
Salazar said that the two deals will lead to $2 million in savings, but won’t be complete before the fourth quarter. It seems unlikely they’ll have a great impact on 2016 numbers.
Headcount has been reduced from a peak of 61 to 43 at the end of the year, and is expected to drop further to 25. Salazar said this will save it $4.7 million a year.
Even with these cost reductions, M+M will still need to essentially double its revenue in order to hit operating profitability, it seems.
The company is pinning some of its growth hopes on .vip, which it expects to do well in China. It launches May 18.
Hall said in a statement that M+M would not follow the lead of competitors (Famous Four Media springs to mind) by offering first-year registrations for free to build market share. He said:
Based on the enquiries received during Sunrise and feedback gained through our two recent marketing trips to China, it is clear that there is genuine interest in the domain both within and outside of China. As a result, we will not be using a year-one freemium approach to simply inflate year-one registrations. Instead, we intend to be keenly priced to ensure margin to ourselves — and registrations — as well as protect the integrity of the domain. The volume we anticipate to be generated through keen pricing will then support the sales of our premium names in this domain.
The company also plans to invest in its .law sales team, because billings for that gTLD have been behind expectations.
M+M had $34.6 million in the bank and eight outstanding contested new gTLD applications at the end of the year.
Nominet chief Russell Haworth is hopeful that its new outsourcing deal with Minds + Machines will help it win a much more lucrative back-end contract — .org.
The company is among the 20-plus companies that have responded to Public Interest Registry’s request for proposals, as its back-end deal with Afilias comes to an end.
Nominet is one of a handful of companies — which would also include Verisign, Afilias, CNNIC and DENIC — that currently handles zones the size or larger than .org, which at over 10 million names is about the same size as .uk.
It, like PIR, is also a not-for-profit entity that donates excess funds to good causes, which could count in its favor.
But Haworth told DI today that showing the ability to handle a complex TLD migration may help its bid.
“I personally think that it would stand us in good stead, but we’ll have to see how the process plays out,” he told DI today. “With .org there’s 19-odd players pitching for that, so it’s a fairly competitive field.”
If the migration were to happen today, we’d be looking at around 300,000 domains changing hands. It’s likely to be a somewhat larger number by the time it actually happens.
Collectively, it will be one of the largest back-end transitions to date, though the largest individual affected gTLD, .work, currently has fewer than 100,000 names in its zone.
Haworth said that the plan is to migrate M+M’s portfolio over to Nominet’s systems one at a time.
He was hesitant to characterize the migration process as “easy”, but said Nominet already has such systems in place due to its role as one of ICANN’s Emergency Back-End Registry Operators.
Earlier this year, Nominet temporarily took over defunct dot-brand .doosan, in order to test the EBERO process.
A back-end migration primarily covers DNS resolution and EPP systems.
It sounds like the EPP portion may be the more complex. Some of M+M’s gTLDs have restrictions and tiered pricing that may require EPP extensions Nominet does not currently use in its TLDs.
But the DNS piece may hold the most risk — if something breaks, registrants names stop resolving and web sites go dark.
Haworth said Nominet is also talking to other new gTLD registries about taking over back-end operations. Registries signed three, five or seven-year contracts with their RSPs when the 2012 application round opened, and some are coming up for renewal soon, he said.
Nominet says it will become a top ten back-end after the M+M migration is done.
Minds + Machines is to get out of the registrar and back-end registry services markets in separate deals with Nominet and Uniregistry.
The cost-saving shake-up will lead to about 10 job losses, or about 25% to 30% of its current headcount, CEO Toby Hall told DI this morning.
Under the Nominet deal, M+M will outsource the back-end registry functions for 28 new gTLDs, currently managed in-house, to the .uk ccTLD manager.
The deal covers all the gTLDs for which M+M is the contracted party (such as .law, .cooking and .fashion), as well as the four it runs in partnership (eg .london) and the five where it currently acts as back-end for a third party registry (eg .broadway).
The company also plans to dump its “unprofitable” registrar entirely, migrating its existing customers to Uniregistry’s Uniregistrar business.
About 49,000 domains will be affected by this move, Hall said.
Uniregistry will pay M+M a commission over the lifetime of the accounts.
Focusing on the registry business was the plan from the moment Hall took over M+M, following a shareholder coup that kicked out founding CEO Antony Van Couvering in January.
Hall told DI:
It [previously] had a very ambitious plan. It wanted to be vertically integrated, but the considered view is there are people out there who are far better able to run parts of the exercise than ourselves, both on the RSP piece and likewise the registrar piece. The strategy from day one was to rapidly evolve into becoming a business-to-business marketing-led registry business and radically overhauling our cost structure at the same time.
The company is currently in a financial quiet period and will not yet disclose the amount of savings it expects to reap, Hall said. He added:
Reducing cost isn’t a strategy for growth, and as a business that will be where we will be judged. Growing our portfolio, growing our domains under management, growing our revenue within those domains. That’s what the business has to be focused on. We see within the industry that the highest value is in the [TLD] ownership part.
The job losses are expected to be largely on the technical side of the house.
The RSP outsourcing means that Nominet significantly boosts its stable of managed TLDs. While it’s in the top five back-ends in terms of DUM (due to the 11 million in .uk) its portfolio of clients there is relatively small, largely limited to a handful of dot-brands.
Nominet CEO Russell Haworth said in a statement:
This partnership takes us into the top tier of registry operators globally by volume of TLDs and compliments the brands we currently manage, such as .BBC, .Bentley and .Comcast. It also underlines our long-term strategy to provide a more diversified range of services to gTLDs and registrars.”
With the Uniregistry registrar deal, Hall said that competing with its own channel “was just not right for us”.
It might be worth noting that Uniregistry is actually a vertically integrated triple-play along the lines of M+M, also, managing its own back-end, registry and registrar businesses.
Hall said that the M+M registrar had sold mainly to domain investors with little interest in buying value-added services such as email and hosting, which is often where much of the profit lies.
Both deals are subject to ICANN approvals, and client approval in case of the back-end transition, will be phased in over many months, and are expected to be finalized by the end of the year.
UPDATE: M+M said later this morning that it is changing its official company domain to mmx.co from mindsandmachines.com.
Former Minds + Machines chair Fred Krueger has taken the company to court, claiming he’s owed shares worth over half a million dollars.
In a lawsuit filed in Los Angeles this week, Krueger says the shares were promised to him in 2007 but have subsequently gone “missing”.
The suit also names as defendants M+M chief financial officer Michael Salazar and Antony Van Couvering, who until last week was CEO.
Krueger himself was asked to leave the company by its board of directors in May last year.
He was one of the company’s founders in 2007. According to his lawsuit, he was promised 25 million shares, which were to be delivered to his Goldman Sachs account in a batch of 20 million and a batch of five million.
Krueger now claims that Goldman has no record of the five-million batch arriving and that M+M has failed to figure out whether the shares were ever even issued.
His complaint says he paid $400,000 for the shares. Judging by M+M’s current share price, they’re now worth around £437,500 ($609,000).
Krueger says that he didn’t notice the shares were missing until forensic accountants picked over his net worth as part of his 2013 divorce.
The suit alleges breach of contract, negligence, and other claims related to the shares. In total, he’s looking for at least $1.5 million in damages.
It also sheds a bit of light on Krueger’s actions immediately following his May 2015 dismissal from the company.
When he “resigned”, he issued a statement via the company that said among other things “my goal is to keep the vast majority of my shares”.
But within a couple of weeks he had started selling and in a matter of months he had disposed of all of his 104 million shares.
Now, according to his lawsuit, his May 2015 “Exit Agreement” with M+M’s board actively incentivized him to sell all of his shares. It says:
In May 2015, Plaintiff Krueger left Minds + Machines Board of Directors under an agreement Plaintiffs Krueger and Needly made with Minds + Machines Group that if Plaintiff Krueger would sell all of his shares in Minds + Machines Group, Minds + Machines Group would return to Needly all of the stock it was holding in Needly.
Needly is (or possibly was, judging by its web site) Krueger’s side project, a web site content management software company.
Krueger says M+M agreed to pay $800,000 and take 1% of Needly’s shares under a consulting agreement. Now, he says the company is refusing to return those shares, as agreed, until he admits that he’s already sold the five million “missing” M+M shares.
Here’s his complaint in PDF format.
It’s a strange old case, and no doubt a distraction for new CEO Toby Hall, who took over from Van Couvering last week with a pledge to boost sales by focusing more on the registrar channel.
Antony Van Couvering has been fired as CEO of Minds + Machines and replaced by someone who was until very recently the company’s agency PR guy.
Neither Van Couvering, the company, nor incoming CEO Toby Hall, have disclosed the reason for his ouster.
But I suspect the “differences and disagreements” that Van Couvering alluded to in his CircleID piece this morning may refer to M+M’s go-to-market strategy.
Hall told DI this morning that his focus as the company’s new leader is going to be on the registrar channel.
“It’s all about engaging with the outside world and recognizing we’re a business-to-business play,” Hall said. “It’s a fundamental shift in perspective.”
The strategy “has to be stacked in a way that makes our business partners make revenue”, he said.
“We’re not a consumer registrar,” he said.
M+M is a vertically integrated domain name company, acting as both registry and registrar.
Registrar sources tell us that Van Couvering wasn’t keen on working with third-party retailers, preferring to focus on its in-house registrar.
It seems that’s going to change under Hall.
M+M said in a press release (jarringly, emailed to reporters this morning as usual by Hall himself):
Mr Van Couvering was removed from office with immediate effect by means of a unanimous resolution of directors passed at a meeting of directors held on 19 February 2016.
The Group is currently making the transition from asset gatherer to monetisation of its leading portfolio of top-level domains; the Board believes a change of leadership will assist in this process.
Hall was appointed chief marketing officer last month.
Since the early 1990s, he’s been head of the London-based PR slash investor relations outfit GTH Communications, which focuses on small-cap businesses. M+M was a GTH client almost since it was founded, Hall said.
He said he’s going to be stepping back from GTH to focus on M+M.
Van Couvering founded Minds + Machines in 2008. It was soon acquired by the company that would be known as Top Level Domain Holdings, which later changed its name to Minds + Machines.
TLDH founder Fred Krueger got canned by the M+M board last year too.
Today, Van Couvering wrote:
It’s a story told a thousand times: founder of a company ousted by investors. It’s a story so common you can find it any day of the week as a minor headline in a tech blog. Not much of a story at all really, until it happened to me…