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Minds + Machines Group Limited: THE INVESTMENT CASE
INVESTMENT OVERVIEW

Minds + Machines happy to go it alone and become "an annuity-based business"

After mulling for almost a year whether to "draw stumps" and sell out, MMX decided a better course of action was to be the party doing the consolidating
Young girl with laptop
INVESTMENT OVERVIEW: MMX The Big Picture
Some of MMX's TLD's, you would not want your kids accessing, but their very existence makes it easier for parents to block access to them

It was a long wait but in the end, the management team at Minds + Machines Group Ltd (LON:MMX) decided to stay independent.

It was on 25 May 2017, that the internet domains firm announced it had appointed a US investment bank to advise it after receiving a number of informal bid approaches.

“The sector remains highly fragmented and the review will explore how strategic options might accelerate shareholder value, in particular, whether and how MMX can participate in a broader industry consolidation,” the firm told investors back then.

Just under a year later investors found out whether Minds + Machines (MMX) wanted to be the company being consolidated into a larger whole or the company making the acquisition when it announced the purchase of ICM Registry LLC, a Florida-based owner of four high value, niche top-level domains.

READ: Minds + Machines acquires 'niche' web domains, reports first year of profitability

“We see big opportunities for consolidation,” the chief executive officer, Toby Hall, told Proactive Investors.

“We think the best way of benefiting from that consolidation in the sector is by being the consolidator. We can deliver far greater shareholder value over the mid-term than just drawing up stumps and being taken out very early in the game,” he said.

Welcome though its success in China was, it had, perhaps, become too dependent on the region​

The strategic review was not just about deciding whether to remain independent or not; the group’s success in China, where the group’s top level domain (TLD), .vip, has been going great guns and it has four more - .law, .work, .beer and .shopping -waiting in the pavilion to come out to bat has arguably left the company overly reliant on revenues from the People’s Republic.

“We’d already recognised that a significant proportion of our revenue comes from China and we wanted to get a better balance,” Hall said.

The acquisition of ICM will address that to an extent, and although Hall has his eye on a number of growth markets further down the line, such as Africa and Latin America, the immediate priority will be making the US business work.

Prior to the group’s launch in the People’s Republic, 62% of all its billings came from Europe and 38% from the US with no contribution at all from the Asia region, so it has a good track record of moving into new territories.

“Wherever there’s growing internet penetration, then, naturally there’s an opportunity for our industry … but there’s plenty of work for us to do first in making America really start to hum,” Hall said.

“We’ve seen very encouraging signals from business year-to-date from our US operations and we think this is a promising signal for the year and likewise for the business,” Hall declared.

The acquisition of ICM also signalled that the company is not resting on its laurels after declaring its maiden profit in 2017.

As promised, the company declared a maiden profit for 2017​

The company reported a US$3.8mln profit, improving from the US$4.5mln loss in the preceding year and operating earnings (EBITDA) amounted to US$5.3mln, from a US$1.3mln loss.

Revenue from renewals doubled to US$4.8mln, from US$2.4mln and total revenue came to US$14.3mln, which was actually lower than US$15mln in the year before - the company had gross billings of US$15.6mln, versus US$15.8mln in 2016.

MMX ended the year with US$15.9mln of cash at the end of the financial year.

Hall added: “2017 has been about proving out the business model: firmly locking-in the operational gains of 2016 to ensure a profitable base, and developing a long-term growth strategy.

“The acquisition of ICM marks a major step forward in our ambitions both to scale and introduce a progressive dividend policy over the next 18 months.

“It cements MMX's position as a leading registry group in the new gTLD [generic top-level domain] sector as we develop into a long-term annuity-based business."

Taking an adult perspective on ICM's niche domains​

Whether deliberately or not, it was about 21 paragraphs into the stock market statement announcing the ICM acquisition before any mention was made of the TLDs ICM owns and operates.

The domains are .xxx, .adult, .porn and .sex, from which it is safe to deduce that MMX is now a bigger player in the internet porn sector than it was.

It is, perhaps, important to note that only around 20% of web sites registered with these domains are active and that ICM benefits from a number of businesses being obliged to register sites with these TLDs to stop somebody else exploiting them; the existence of a teletubbies.xxx site does not bear thinking about.

Hall said that revenue from the sex sites will still only be about 30% of MMX’s revenues, which is standard for the industry.

His take on it is that it’s all about “clear labelling” and offering a level of protection.

“From a regulatory point of view it [the creation of adult TLDs] was about consumer protection, in the same way, that when you go to see a film, you know the rating. If you have a streamed media source, you’ll have a very clear idea of what the content will be before you download it,” Hall explained.

“That is the context of why these zones, these TLDs, were created in the first place” he added.

Hall said he was impressed by how ICM had gone above and beyond that simple premise of protection, appointing an independent body to effectively provide appropriate policies, and then monitoring adherence to those policies.

“It’s all about guidance,” Hall said.

“What is particularly appealing for us is that the majority of registrations are actually brands and individuals protecting their name. That, for us, is why it makes it such a compelling proposition because when you look at it from a renewals make-up, over 78% of their income is from renewals,” Hall revealed.

Once a party has held the domain for more than two years, the renewal rate moves up into the nineties and that, as Hall pointed out, fits in perfectly with MMX’s goal of becoming “an annuity-based business”.

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