CentralNic Group Plc (LON:CNIC), the global software platform company supporting subscription web services including domain names, has today announced a pre-close trading update for the six months to 30 June 2017 (“the Period”). The Company’s interim results for the Period will be published on 7th September 2017.
Revenue for the Period is expected to be 19% ahead of the prior year at £10,587,000 (2016: £8,931,000) with adjusted EBITDA*, excluding foreign exchange gain and losses, rising 50% to £1,367,000 (2016: £908,000). Adjusted EBITDA* including foreign exchange is estimated at £1,055,000 including an £312,000 foreign exchange loss (2016: £1,309,000 including a £401,000 foreign exchange gain). Cash at 30 June 2017 was £9,570,000.
Given the consistently heavy second-half weighting of results in recent years, the Board is confident that the Company is on track to meet market expectations for the full year to 31 December 2017, as the Company continues to diversify through the acquisition of businesses with high-levels of recurring revenue and takes advantage of increased opportunities to trade in valuable premium domain names.
*Adjusted EBITDA: Earnings before interest, tax, depreciation and amortisation, acquisition costs, exceptional items and non-cash charges.
Agreement to acquire SK-NIC, A.S., Manager of Slovakia’s Top-Level Domain, .sk
The Board of CentralNic is pleased to announce that it has agreed to acquire the business and assets of SK-NIC, the manager of the exclusive country code top-level domain for Slovakia, .sk. The Board believes that this will represent a major, strategic and earnings enhancing acquisition for the Group.
Acquisition description and rationale
· Agreement to acquire for initial cash consideration of €21.27 million with deferred cash consideration of up to €4.85 million, dependent on SK-NIC attaining defined growth targets over the next three years.
· Acquisition is expected to legally complete around the beginning of September 2017.
· Acquisition in line with CentralNic’s core growth strategy:
o Earnings enhancing acquisition of a business managing a substantial country code top-level domain. The Board anticipates double digit earnings enhancement for the first full year of ownership.
o Increases visibility and predictability of Group revenue, with a larger proportion being generated from recurring revenue streams.
o SK-NIC provides access to a new international market with sustainable growth characteristics – including growing demand for the .sk domain, the dominant domain in the Slovak market.
o Introduces .sk as a new product to the CentralNic portfolio with excellent visibility of earnings, and a high renewal rate of over 77%.
o Opportunity to leverage CentralNic’s existing expertise and bespoke technical platforms in the domain management business.
Integration strategy
The existing management and staff will join the CentralNic Group. Local management has already started to work with Group functions to execute an effective and collaborative integration process, including:
· Migrating SK-NIC’s systems to CentralNic’s proprietary registry platform, which will provide technical and software consistency and greater technical scalability and resilience across the wholesale business.
· CentralNic Group has entered into transitional services agreements with the vendor DanubiaTel a.s. to provide operational services such as datacenter services, IT support & security management, legal & finance support, human resources support, and other administrative services to ensure uninterrupted operations and client service for SK-NIC’s customers. These services will be transitioned to CentralNic over the terms of these agreements.
Transaction details
The initial cash consideration is being funded by the Company’s own cash reserves and a term loan of £18 million, provided by Silicon Valley Bank (“SVB”). SVB is also providing a £3 million overdraft facility. It is expected that the deferred consideration will be paid from the profits of the enlarged Group.
The vendor is Danubia Tel Netherlands B.V. which is a subsidiary of Danubia Holding, a.s.
The acquisition involves the purchase of the business, including all the property, rights and assets, of SK-NIC. SK-NIC has managed the .sk country code since 1993 and is officially recognised as the sponsoring organisation of the Slovak country-code top-level domain (“ccTLD”) by the worldwide governing body, the Internet Assigned Numbering Authority (“IANA”).
SK-NIC has a long term track-record of growth in domains under management, supported by strong performance by the Slovak economy over recent years. Slovakia has a population of over five million and delivered GDP growth almost double the Eurozone average for 2015. It has an estimated penetration of 63 domains per 1000 head of capita as at 31 December 2016, compared to the neighboring Czech Republic at 121 domains per 1000 head of capita and to the UK with 162 domains per 1000 head of capita – indicating significant growth potential with competitive pricing and service levels.
SK-NIK has attractive cash conversion characteristics, as domain name customers typically pay annually in advance. Furthermore, SK-NIC enjoys a high domain name renewal rate of over 77%, providing consistent and attractive recurring revenues from a diversified customer base, which includes over 360,000 domains under management and over 2,100 active retailers in Slovakia.
CentralNic intends to invest to improve the SK-NIC service using the Group’s superior platform technology and through the provision of new services. The team and training in Slovakia will be strengthened, placing a new emphasis on marketing, communications and retailer support. There will also be a commitment to supporting the Slovak internet community by offering a superior service at more competitive prices than provided historically. The Group will also contribute five percent of SK-NIC’s revenues to a fund dedicated to projects that contribute to the Slovakian digital economy, under the terms of a co-operation agreement with the Slovakian Government.
SK-NIC began the process of upgrading its systems to the world class CentralNic platform in the first half of 2017, as well as reducing its pricing to internationally competitive levels in two stages, in September 2016 and January 2017 – establishing new cost and revenue baselines for the growth expected under CentralNic’s ownership. Restated using CentralNic’s accounting policies and IFRS standards (which defer revenue over the life of a domain), SK-NIC’s unaudited Profit before Tax and Adjusted EBITDA in the first half of 2017 were €1.08 million and €0.97 million respectively on revenues of €1.89 million. The unaudited results for 2016 (predating the systems upgrade costs and price reductions), restated under CentralNic’s policies and IFRS standards, were Profit before Tax of €3.58 million and Adjusted EBITDA of €3.38 million on revenues of €4.14 million.
Ben Crawford, CentralNic Group Plc CEO, said: “SK-NIC is a major, earnings enhancing acquisition for Group, which is wholly consistent with our growth strategy. The business will benefit significantly from CentralNic’s technology and expertise, to improve its security, resilience and growth, as well as bringing to the Group strong recurring revenues. The .sk country code adds a substantial new product and SK-NIC’s network of over 2,100 local retailers extends our geographic footprint into an important new market with considerable growth potential.
“The acquisition of SK-NIC moves us another step forward in our strategy to increase substantially the proportion of Group revenues generated from recurring revenue streams spread across diversified products, territories and customer types.
“We continue to pursue this roll-up strategy and our goal, which is to continue to build a global business of considerable size and scale.”
Zeus Capital Said:
Major earnings enhancing acquisition boosts recurring revenues, H1 in-line
CentralNic has announced the major acquisition of SK-NIC, the manager of the exclusive country code top-level domain for Slovakia, .sk. The deal is for an initial consideration of €21.3m, with deferred cash consideration of up to €4.9m dependent on hitting defined three year growth targets. In unaudited accounts for the first half of 2017, with SK NIC establishing new cost and revenue baselines, it achieved revenue of €1.9m, EBITDA of €1.0m and PBT of €1.1m, all of which are expected to grow under CentralNic ownership. The deal will be immediately earnings enhancing (we forecast 15% accretion to our PBT forecast in the first full year of ownership) and is being funded by an £18m term loan and £3m overdraft, with deferred consideration paid from the profits of the enlarged group.
Acquisition delivers the core objectives of CentralNic’s global growth strategy. The deal is immediately earnings enhancing despite significant planned investment in the business. It significantly increases revenue visibility, boosts recurring revenue streams due to high renewal rates of over 77%, as well as establishes a dominant position in a new international growth market. SK-NIC is a quality, high margin business (c.80% gross margin), with a long term track record, having managed .sk since 1993. There is also an integration strategy in place with significant opportunities to leverage CentralNic’s expertise and superior technology.
New forecasts. The acquisition boosts gross profit by 12% and 23% in FY17 and FY18 respectively. Our EBITDA forecasts increase an impressive 7% and 25%, despite additional investments of £0.3m and £0.5m in SK-NIC over the next two years to drive growth and performance. The result is that the acquisition is 4.8% and 14.9% enhancing to our adj. PBT in FY17 and FY18. Our group tax rate assumption also reduces to 18.5% in line with revised guidance.
