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Minds + Machines bidding to grow

Published: 06:04 10 Jun 2014 EDT

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One-off gains saw Internet domains seller Minds + Machines (LON:MMX) move into the black in 2013.

The company, formerly known as Top Level Domain Holdings, made a profit of £4.12mln from losing one more generic top level domain (gTLD) auction than it won in 2013; under the domain name auction system, the winning bid is divided among the losing contestants.

The net gain from gTLD auctions pushed the company into the black, with a profit before tax of £729,000 versus a loss of £3.06mln the year before, despite revenue easing to £36,000 from £420,000 in 2012.

The low revenue level reflects the fact that the company had only just started making the transition in 2013 from a company bidding for gTLDs to one also earning recurring revenue from all aspects of the domain name business, namely registry, registry service provision and registrar operations; a registrar is an organisation that helps users to register their domain names, whereas a registry is an organisation that holds the database of all registered domain names in a certain TLD, such as .london.

The company had cash reserves of £21.7mln at the end of April, providing it with plenty of firepower to compete in future gTLD auctions.

“We believe that our cash resources are more than sufficient to get us to profitability and take advantage of these tremendous opportunities. This is though only the beginning and the board is excited about the prospects for the group," said executive chairman, Fred Krueger.

Since the end of 2013, the company has successfully launched the .london domain and, speaking to Proactive Investors, the company’s chief executive Antony Vancouvering said “we are pleased so far with that,” but suggested that a truer picture will emerge in six months or so.

With World Cup fever about to envelop us all, Vancouvering said the company had not made any play for football-related domains.

“If you want to do something with football, you had better be working with all the major sports organisations,” Vancouvering said. “It’s not where we thought our sweet spot would be,” he added.

The company does have .rugby in its portfolio, not to mention .fishing for those that want to get away from football hyperbole.

As an American, Vancouvering has more interest in .soccer, “but you [Brits] don’t believe that is actually a word,” he quipped.

The company is making the transition to a true operating company, with less reliance on income from failed auction bids, and this transition will see marketing expenditure will ramp up, the company revealed.

Marketing expenses through the first quarter of 2014 amounted to £252,000 and Vancouvering told Proactive Investors that it is difficult to put a number on how much will be spent on marketing this year, as the company is still working out what forms of marketing are most effective.

“Now we have some TLDs that are almost live, we are beginning to do a lot of testing to see what channels work,” Vancouvering revealed. “So, I think our marketing spend is going to be based on what the effect is - you know, costs per acquisition - and until we know what those are we have to do a lot of testing, but when we know what those [costs] are, then you’ll see our marketing expense go up.”

As the company begins generating revenues from the first live gTLDs in which it has an interest, it expects revenues from ongoing operations - as opposed to those derived from one-off private auctions and the equivalent - to move the group into a cash neutral position during the latter part of 2014.

“We further expect revenues to continue growing in 2015 as a result of the ongoing launch programme of our gTLD portfolio,” disclosed chief financial officer, Michael Salazar.

Vancouvering parting comment in his conversation with Proactive Investors summed up the unusual nature of the business, at least while the round of gTLD auctions are in progress.

“We could lose some big ones [auctions] and walk away with some money, or we could win a great TLD and be poor, so these profit/loss numbers are not terribly reflective of how we are doing,” he said.

“In six to nine months we’ll have a much better view of what this landscape looks like.”

House broker N+1 Singer said the value of the company’s portfolio is emerging.

“The group currently has a market capitalisation of £99mln, and an EV [enterprise value] of £77mln. The group has 30 uncontested top level domains which it either wholly- owns or has an economic interest in. Crudely, this is equivalent to a value (EV) per domain name of £2.6mln.

“On top of this, the group has a further 35 wholly-owned contested applications as well as 8 partner/client applications which it will look to resolve via private auctions which also have value. As such, we believe that with strong execution on its different business strands (registry, registrar, and registry service provider), the value of the group should exceed the current market capitalisation given the portfolio’s potential to generate significant levels of profit and cash in the future,” the broker said.

Minds + Machines shares were down 0.9% at 11.89p in late morning trading, having initially risen to 12.2p on the figures.

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