CentralNic Group plc (LON:CNIC), a leading global player and consolidator in the recurring revenue domain and web services industry, has today announced its half year results for the six months ended 30 June 2018, which demonstrates the strong underlying organic growth in combination with the positive impact of the SK-NIC acquisition.
Highlights:
· Gross profit of £3.9m (H1 2017: £3.0m) – up 30.7%
· Revenue of £11.2m (H1 2017: £10.6m) – up 5.5%
· Adjusted EBITDA* of £2.1m (H1 2017: £1.1m) – up 95.0%
· Adjusted EBITDA*, excluding forex gains and losses, of £2.3m (H1 2017: £1.4m) – up 65.3%
· Net debt of £8.6m (H1 2017: Net cash £7.7m)
· A period of transformation in the lead-up to the completion of the $55 million acquisition of KeyDrive S.A. (“KeyDrive”) in August 2018
*Adjusted EBITDA: Earnings before interest, tax, depreciation and amortisation, acquisition costs, exceptional items and non-cash charges.
Operational highlights:
· Recurring revenues continue to increase; reflecting the Group’s strategy, as exemplified by the acquisition of SK-NIC in December 2017 and post period-end acquisition of KeyDrive – both 90%+ recurring revenue businesses
· Retail division continues to focus on optimising strategic marketing performance, which is realising higher rate of returns on marketing spend
· Wholesale business maintained its lead in global market share by volume, being the only company to support eight of the Top 25 new Top-Level Domains (“TLD”)
· Significant new client wins as a registry service provider included .ooo, .best, .kred, .ceo and .icu
· Enterprise division’s increasing focus on recurring revenue products and services, reinforced post period-end by the introduction of BrandShelter corporate domain management and brand protection services
· The Group reported an unadjusted operating loss of £1.0m (H1 2017: £0.7m) mainly driven as a result of intangible related amortisation of £1.6m, acquisition and non-recurring fees of £1.2m, and other non-cash items of £0.3m, and after adjusting for these items, £2.1m was the resulting adjusted EBITDA
· Net debt of £8.6m (H1 2017: Net cash of £7.7m) as a result of debt financing of the SK-NIC acquisition in December 2017
· SK-NIC integration has successfully completed with pleasing post-acquisition contribution to the Group
Post half year end highlights:
· Acquisition of KeyDrive S.A., effectively doubled the size of the Company:
– On 2 August 2018, the Group announced that it acquired the share capital of KeyDrive, a strong player in the internet domain name and web services industry
– The initial consideration of $35.8m, represented an enterprise value of $44.5m, plus a performance based earn-out of up to $10.5m. The initial consideration consisted of $16.5m in cash and $19.3m in shares of CentralNic, plus a cash adjustment for working capital at completion and settlement of debt like items
– The board of directors of the Group (the “Board”) believes that this represents a transformative, earnings enhancing acquisition, further increasing the Group’s recurring revenues and diversifying the Group’s underlying businesses
– An equity raise of £24m was executed in order to fund the initial cash consideration of the KeyDrive acquisition, with 17 new holders joining existing holders in funding the deal
– The integration of KeyDrive is progressing as planned across all working groups
· H1 2018 unaudited summary financials for KeyDrive, which are in line with management expectations, are shown below:
– Revenue – $31.8m
– Gross profit – $5.5m
– Adjusted EBITDA – $3.3m
– Net cash of $0.3m – the external debt of KeyDrive was settled by the CentralNic as part of the acquisition
· Acquisition of GlobeHosting:
– As announced on 6 September 2018, the Group acquired the business assets of GlobeHosting, a Romania and Brazil focused domain registrar and provider of hosting solutions and SSL certificates
– The consideration for the acquisition consisted an initial consideration of €1.5m, and a deferred consideration of €1.1m, resulting in the total consideration of €2.6m
· Reporting currency:
– Following the acquisition of KeyDrive S.A. the Board are considering changing the reporting currency of the Group’s consolidated financial statements from Sterling to US dollars and, if they determined to do so, for this to take effect from the Annual Report 2018 onwards. This change would be driven as a result of US dollar being the main underlying currency in which the Group and market operates. KeyDrive also reports its trading performance in US dollars, and consequently the Group has taken this opportunity to make its reporting currency consistent with KeyDrive and the wider domain industry
Mike Turner, Chairman of CentralNic Group plc, commented:
“Our first half results are most encouraging as CentralNic continues to deliver consistent organic growth whilst at the same time concluding earnings enhancing acquisitions.
“CentralNic’s organic growth and roll-up strategy continues to be bolstered by a determination to escalate the size and scale of the business by concentrating on activities which will deliver high quality earnings and recurring revenues focused on the higher-margin and higher-growth segments of the market.
“2018 will be backend loaded following the KeyDrive acquisition occurring in August, second-half results will show a heavier weighting than those of the first-half. The Board is confident that the Company is on track to meet market expectations for the full year to 31 December 2018.”
CHIEF EXECUTIVE OFFICER’S STATEMENT
In the first half of 2018, it is pleasing to report that the Group’s revenues and adjusted EBITDA profit, excluding foreign exchange gains and losses, have shown growth of 5.5% and 65.3% respectively whilst improving the quality of earnings. The Group’s gross margin increased markedly to 35% (2017: 28%) with absolute gross profit increasing by £0.9m, following the SK-NIC acquisition in December 2017 and the focus on improving margins. The Group’s stability and visibility of earnings is underpinned by its stable recurring revenue base and predictable renewal rates, ensuring that the Group is well positioned to maintain and grow its profitability.
As the Group continues to move forward with its growth strategy, it intends to further increase its recurring revenues, in turn reducing the proportion of revenue represented by non-recurring sources. This is underpinned by its industry consolidation strategy, which is focused on businesses with strong levels of recurring revenue. During 2018, CentralNic has completed two acquisitions to date, including the reverse takeover of KeyDrive.
The Company oversaw a period of transformation in the months leading up to the completion of the acquisition of KeyDrive on 2 August 2018. On 14 March 2018 the Company was required to announce, the existence of discussions regarding the potential acquisition of KeyDrive, which led to the suspension of trading in the Company’s shares. This period enabled the combined Group to operate cohesively from completion of the acquisition, with much of the integration already planned in detail or completed.
The KeyDrive group performed well in H1 2018, generating revenues of $31.8m, gross profit of $5.5m and adjusted EBITDA of $3.3m. This was in line with management expectations. The integration of KeyDrive is on track and progressing efficiently, with the senior and experienced management team in place. The integration of the sales, marketing and operations teams is already under way and our new and existing customers are beginning to realise the benefits. The teams and processes are being aligned as part of the migration to unified platforms and reporting structures.
The integration of SK-NIC has progressed according to plan and was completed in H1 2018. The .sk registry has been migrated onto a customised version of the CentralNic registry software in the Slovak language. The marketing, finance and supporting functions have been integrated into the operations of the enlarged Group, and strengthened with the addition of a Finance Manager and Head of Communications in Bratislava. Trading since the acquisition was completed is in line with expectations.
Retail Division
The Retail division generated revenues of £6.8m (H1 2017: £8.0m), adjusted EBITDA of £1.4m (H1 2017: £0.9m) and adjusted EBITDA, excluding foreign exchange gains and losses, of £1.3m (H1 2017: £1.1m).
The short-term reduction in revenue was in line with management’s expectations, as the division continued to realign and optimise its online marketing strategy for improved return on investment, resulting in higher margins and profitability despite reduced revenue.
Wholesale Division
The Wholesale division generated revenues of £3.9m during the first half of the year (H1 2017: £1.8m), adjusted EBITDA of £1.3m (H1 2017: £0.5m) and adjusted EBITDA, excluding foreign exchange gains and losses, of £1.6m (H1 2017: £0.55m). This period included a full six months of trading for the SK-NIC business which was acquired in December 2017. The SK-NIC segment performed in line with management expectations, producing £1.6m of revenues and adjusted EBITDA of £0.7m.
The division continues to evolve with a blend of businesses reflecting demand for heavily promoted and low-priced new TLDs, the high volumes offsetting lower per domain revenues. Domain renewals now account for 25% of new gTLD transaction volumes (H1 2017: 18%), and for 20% of overall domain transactions in H1 2018 (H1 2017: 15%).
The period saw the Wholesale division maintain its lead in the new TLD market, closing out the half year as the only company supporting eight out of the top 25 new TLDs from a total of 1,224 new TLDs launched. These TLDs, .website, .space, .tech, .site, .online, .ooo, .store and .xyz, retain their top 25 global rankings.
New Top Level Domains won in the period include: .ooo, .best, .kred, .ceo, and .icu, all of which are live on CentralNic’s registry infrastructure. CentralNic also continued to win and deliver contracts selling value-added services to domain registries, such as business, marketing and policy consulting and software licensing.
Enterprise Division
CentralNic’s Enterprise division generated revenues of £0.5m in the first half of the year (H1 2017: £0.8m) and adjusted EBITDA of (£0.1m) (H1 2017: £0.2m). In line with management expectations, the decrease in revenue reflects the Group’s strategy to reduce the proportion of its overall revenues derived from one-off premium domain sales revenues, which contributed over £0.3m in revenues in H1 2017.
The shift of the Enterprise division’s product mix and activities towards a recurring revenue model continues, following the acquisition of KeyDrive in August 2018. The addition of KeyDrive’s BrandShelter brand to the Enterprise division provides significant opportunities for growth as the company fast-tracks the introduction of corporate registrar and online brand protection services through its global distribution network.
Management and Board
There were no Board or senior management appointments in the first half of the year. With the completion of the acquisition of KeyDrive in August 2018, Alex Siffrin, CEO and founder of KeyDrive, joined the enlarged Group as Chief Operating Officer, and Michael Riedl, Chief Financial Officer of KeyDrive, as Deputy Group Chief Financial Officer. The addition of Alex and Michael to the senior management team brings a wealth of industry experience that complements those of the other team members.
Outlook
The Company’s strategy is to grow organically and through industry consolidation, with future acquisitions aligning well with one of the Company’s four key industry channels of Corporate, Registry, and Reseller & Retail (reflecting the post-KeyDrive acquisition restructure). The Company’s technology platforms, following the acquisition of KeyDrive, are very strong and cost synergies would be expected from any acquisition that fitted into one of these divisions. Private Equity and other stand-alone bidders find it difficult to compete with the commercial package, industry knowledge and established technical platform that a CentralNic offer brings.
Furthermore, the Company has access to funding for suitable acquisitions. In addition to its own cash reserves and debt facilities, the Company has increased its institutional investor base by 17, following the £24m equity raise in August 2018 to fund the KeyDrive acquisition.
The business is expanding geographically too, as high-growth markets present a significant opportunity for the Company to roll-out its industry know-how in regions with the fastest take-up of the internet globally and a pressing need for domain names and web services.
The Group has made three profit-enhancing acquisitions in the last nine months. The successful integration of the Group’s previous acquisitions, coupled with the announcement of the KeyDrive and GlobeHosting acquisitions in 2018, are clear milestones in the execution of its strategy. This is supported by the ongoing development of its existing business through its continued success in winning new clients and contracts, and the introduction of new value-enhancing products such as Registry lock, and new SSL certificate and website builder products.
CentralNic is confident of trading in line with market expectations for the year and delivering its vision of becoming a major global-player in the provision of subscription website-related services to business in years to come. Reflecting the highly cash generative nature of the business, CentralNic’s Board has committed to start paying a dividend, with the initial dividend relating to the 2019 financial year.
I would like to thank CentralNic’s personnel for their professionalism and commitment to the ongoing growth and transformation of the business. It is thanks to them, to our clients and to our distribution channel partners, as well as our shareholders, that the Group continues to maintain and enhance its industry-leading position.
Ben Crawford
Chief Executive
