CentralNic takes AIM at gTLDs

Source: http://megabuyte.com/news/news/10744/centralnic-takes-aim-gtlds

Megabuyte

2ND SEP 2013 - The latest tech IPO to hit the London market sees domain name registry service provider CentralNIC join Aim after raising £7m to exploit the new generic top level domain opportunity, giving a market capitalisation of £32.5m. With a valuation of c28x historic EBITDA , the company follows recent highly valued IPOs of Outsourcery and WANdisco, but there is no doubting the company's solid financial performance to date.

CentralNIC Limited describes itself as a registry service provider, deriving revenue from selling its own internet domain names through registrars as well as managing domain names on behalf of third parties on a revenue share basis. These include both top level domains (TLDs) such as .la (the code for Laos) and second level domains (SLDs) such as .uk.com. The company claims ownership of 24 premium names as well as management contracts for seven domains, including two country codes (for Laos and Palau).

The growth opportunity for CentralNic is seen as the launch of new generic TLDs from the end of 2013 (gTLDs), with the company being awarded exclusive distribution rights for 60, including .wiki, .college, .reit, and .contact.

According to the admission document, CentralNic generated revenues, EBITDA and net income of £2.9m, £1.1m and £0.6m respectively in the year to December 2012, up 16%, 36% and 48%. Gross margins are a weighty 59%, whilst EBITDA margins of 39% are not to be sniffed at. Operating cash conversion was a very respectable at 95% of EBITDA; indeed in prior years operating cash flow has exceeded EBITDA, reflecting the attractive working capital characteristics of domain name services. Capex is minimal. The two largest customers account for 18% and 12% of revenues respectively. The company is largely debt free, with the funds raised being used for growth capital.

As for the IPO, the company raised £5m of new equity whilst selling shareholders received £2m, with the 55p share price giving a market valuation of £32.5m (£35.4m fully diluted). The pre money valuation was thus c£27.5m, or £30.4m fully diluted. The fully diluted valuation is 28x historic EBITDA and 51x PE. We are not privy to broker forecasts, but one assumes that the 2013 accounts may well show similar growth to 2012, with the new gTDL-driven growth only kicking in from 2014.

First thoughts

In keeping with recent tech IPOs (for example, Outsourcery, WANdisco), CentralNIC has managed to achieve a premium valuation at listing by selling itself on new technology trends or opportunities; in this case new gTLDs versus hosting voice and unified comms for Outsourcery and Big Data for WANdisco. Ironically, whilst CentralNIC has floated in order to raise funds for the new gTLD opportunity, one of the rationales for the take private of GroupNBT by Hg Capital in September 2011 was to prepare for the new gTLD opportunity away from the glare of public markets. Hg paid an estimated 21x PE for GroupNBT for the year to June 2011.

The domain name business is a generally attractive one, with typically long term contracts, advanced fees, and relatively low cost of sale of maintaining names, and CentralNIC's growth and financial profile is certainly impressive with decent growth, good margins and operating leverage and attractive cashflow characteristics. However, as with Outsourcery, the valuation bakes in strong growth and flawless execution though, unlike Outsourcery, CentralNIC is already nicely profitable and cash generative, and there are arguably more barriers to entry to its activities compared with hosted voice and unified comms. We look forward to tracking CentralNIC's progress.