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Minds + Machines Group Limited: THE INVESTMENT CASE

Minds + Machines investors await outcome of strategic review but Chinese progress success boosts confidence

Minds + Machines launched the review in late May after receiving a number of informal bid approaches, and discussions are ongoing.
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INVESTMENT OVERVIEW: MMX The Big Picture
The .vip domain has been a success

Investors in Minds + Machines Group Limited (LON:MMX) are still waiting to hear what will become of the group’s ongoing strategic review, nonetheless, Wednesday’s trading update gave them some reasons to be optimistic.

First, the web domains business gave an upbeat update on renewal rates in China – where the .vip domain has been a huge success and with first-year rates surpassing 75%.

Meanwhile, with the review process, investors were told discussions are ongoing with a number of “interested parties” from Asia, North America and Europe. We’ll learn more on this front when the company, one of the world’s leading operators and owners of internet top-level domains, publishes its interims in late September.

Minds + Machines launched the review in late May after receiving a number of informal bid approaches.

Chinese success story

On China, where the .vip domain has been a huge success, M+M said first-year renewal rates have surpassed 75% - which is among the best-in-class. Chief executive Toby Hall said it was encouraging to see early sales “transition into meaningful first year renewals”.

“This both validates our premium pricing model and demonstrates the underlying robustness of the Chinese domain market when appropriate roll-out strategies are executed that are not reliant on aggressive discounting tactics,” he added.

Hall said the strong renewal rates, as well as new registrations that have grown by over 45% in the first-half, also bode well for the firm’s premium revenues from China in the final six months of the year.

The firm, which sells generic top-level domains (gTLDs) via resellers around the globe, last year brought in a new Chinese cornerstone investor last year in the shape of Goldstream Capital Master Fund I - which subscribed for £5.5mln worth of shares (42.3 mln shares) and a tender offer to all shareholders of 100 mln shares worth £13mln, or 13.2% of the entire issued capital.

Cornerstone Chinese investor

Goldstream is owned by multi-billion dollar group Hony Capital - China's leading private equity group - which specialises in taking firms into China, and MMX believes it will help it increase its presence in Asia, where it sees immediate growth potential.

At the time, MMX’s chief executive Toby Hall described the cornerstone investment as a 'key moment'.

Prior to the group’s launch in China last year, MMX had no exposure to the country. As at the end of 2015, 62% of all its billings came from Europe and 38% from the US with no contribution at all from the Asia region.

Validation of premium pricing

Chief executive Toby Hall said it was encouraging to see early sales “transition into meaningful first year renewals”.

“This both validates our premium pricing model and demonstrates the underlying robustness of the Chinese domain market when appropriate roll-out strategies are executed that are not reliant on aggressive discounting tactics,” he added.

Hall said the strong renewal rates, as well as new registrations that have grown by over 45% in the first-half, also bode well for the firm’s premium revenues from China in the final six months of the year.

That’s because M+M will start releasing its 2017 .vip premium inventory to the broader market for the first time, off the back of the published first year renewal rates.

Major landmark coming quicker than anticipated

CEO Hall was upbeat on prospects for the sales - and expects the company to hit a major financial landmark more quickly than anticipated.

"Whilst the holding back of material premium inventory in China, and no scheduled new domain launch in the period, will mean first-half 2017 sales will not repeat the quantum of first-half 2016, the quality and make-up of the revenue is significantly improved,” he said.

“This gives the board confidence that the company is on track to achieve a key benchmark where recurring revenues from renewals should be equal to or greater than fixed overheads - earlier than anticipated, and within the current financial year.”

Harold Evans, analyst at City broker finnCap, said: “It is clearly very encouraging to see a sustained level of demand from both new and existing customers and in so doing, this reiterates .vip’s significant value.”

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