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MMX stung for $7.7 million by crappy .london contract?

Kevin Murphy, April 26, 2017, 11:23:12 (UTC), Domain Registries

Did MMX take a $7.7 million accounting hit to renegotiate a crappy .london gTLD contract? It looks a bit like that to me.
Found in the company’s full-year 2016 financial results yesterday is the disclosure that it had to pay off an undisclosed gTLD partner after originally making “overly ambitious” predictions about its likely popularity.
The deal apparently had MMX — then under previous management as Minds + Machines — making guaranteed payments to its partner on the assumption that it would sell a lot more domains than it eventually did.
.london currently has about 56,000 names in its zone file, down from a post-launch peak of about 65,000.
According to its statement to the markets, MMX recorded a 2016 one-time contract restructuring expense of $3.8 million and has added a $3.9 million intangible asset to its balance sheet in relation to the contract.
That’s a total of $7.7 million, but CEO Toby Hall told DI that the cash payment was nowhere near that amount. He said:

in reality we have paid no where near that amount and much of this is the accounting treatment of a new contract that we believe has the potential to deliver future economic value to the business and will be covered from future revenues.

The gTLD in question is not named in the statement, and Hall also declined to name it in response to a DI inquiry, but MMX says of the contract:

In very early 2012, at the time when ICANN was still accepting new generic Top Level Domain applications, the then Executive Team entered into an overly ambitious agreement that it believed would provide value to the overall profile of the Group. The agreement had very significant financial commitments over the life of the contract and did not include any clauses that could allow the Group to renegotiate those commitments should the specific top-level domain not perform to the agreed financial projections. The growth of this top-level domain has not come close to meeting those expectations and the agreement has proven – and would have continued proving – to be a significant drag on the Group’s ability to generate positive cashflow from the given TLD.
In late Q4 of 2016 the current Executive team was able to successfully conclude renegotiations of certain components of the agreement by either restructuring or buying out certain financial commitments thus making it more economically viable going forward. As a result of the renegotiation effort, the Group has revised its modeling and believes that it can derive future economic benefit from the renegotiated contract. Accordingly, based on Management’s review, a portion of the buy out ($3.8million) has been expensed as a one-off restructuring cost while the remaining portion ($3.9million) will be capitalized as an intangible asset with future economic benefit.

All the evidence points to .london being the gTLD in question.
First, MMX says that the deal was entered into in “very early 2012”, which ties up with the timing of the request for proposals by the Mayor’s marketing office, London & Partners.
Second, MMX doesn’t have any other partner-based gTLDs that would plausibly have such ambitious commitments.
Third, MMX has previously stated that it was renegotiating some “burdensome” contracts. Last year, without relating it to a renegotiation, it said in a trading update that it was “encouraging to see an increasingly commercial and flexible approach from London & Partners, our Dot London partners”.
Fourth, word on the street back in 2012 was that L&P (which remember is affiliated with the London Mayor, an elected political office) had gone with tax-haven-based MMX rather than UK-based non-profit Nominet because MMX (then Minds + Machines) had offered the best financial incentives.
The scrapping of the old deal is perhaps another indicator of the hubris that accompanied the opening of the new gTLD program five years ago.
While L&P is the “owner” of .london, for want of a better word, in practice I gather that MMX runs it pretty much as if the gTLD was part of its regular portfolio.
The news of the contract changes were made in MMX’s audited 2016 results, which showed its billings doubling to $15.8 million during the year.
Revenue was $15 million, up from $6.3 million in 2015. Less partner payments, revenue was $13.5 million versus $5.5 million a year earlier.
The statement has half a dozen or more bottom lines, depending on what costs you exclude, but the one MMX wants us to look at is “Billings Operating EBITDA before one off restructuring costs”, which was $4.2 million compared to a loss of $6.6 million in 2015.
That, in other words, means that an unprofitable company has become a profitable one.
A lot of that has to do with the revenue from hundreds of thousands of .vip domain sales in China and a swingeing restructuring that led to headcount being slashed from 43 people to 20 people.
The company also sold off its registrar business to Uniregistry and started outsourcing its back-end functions to Nominet.
For 2017, the company has already disclosed two huge sales that will boost domains under management considerably, but at the risk of concentrating a larger part of MMX’s business outlook in just a few hands.
UPDATE: This article was updated a few hours after publication to clarify what MMX has said in relation to .london in previous trading statements.

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Comments (7)

  1. Snoopy says:

    They made a net loss of $6 million for the year. Obviously they are trying to put the focus on “better sounding” numbers that exclude a bunch of costs.
    Great research on contract, very interesting.

  2. BetTheLot says:

    Second that great research

  3. MMX had a big part in the .london failure.
    They had the worst launch I have seen and crazy premium renewals. They drove everybody away.

  4. gpm group says:

    Very good journalism – great research.

  5. Dot Advice says:

    yep, @2011 projections were 8M regs . How we all got these gTLDs so so so wrong. Now MMX= BUY – now all the crap has finally been cleaned up/w off.

    • Snoopy says:

      “Now MMX= BUY – now all the crap has finally been cleaned up/w off.”
      Dot advice, did you even know about “this crap” before this all came out. They may well have other skeletons in the closet as their statements tend to be smoke and mirrors.
      They are burning cash at a fast rate, a lot of which has been spent on try to keep the share price from falling. $19 million gone in the last 12 months alone in covering losses and share buybacks, now only $15 million remaining. At the end of 2014 they had $45 million in the bank.

  6. The pseudo-ccTLDs (they are gTLDs but preform like ccTLDs) like .LONDON tend to perform with a similar slow growth and acceptance curve. The whole premium registrations thing is very much a PR exercise in an unproven TLD and depends on people who hope that the TLD will be successful.
    The problem is that a new TLD needs to kickstart development and usage and the registry has to do a lot of the heavy lifting on marketing. Many premium registrations are never developed into the kind of sites that help with the awareness of new TLDs and they are, in effect, a negative influence on the public perception of the TLD unless they are developed into working, useful, websites. That takes time, money and effort.

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