viewMinds + Machines Group Limited

Minds + Machines clears the decks to more easily demonstrate future progress

In its interims, management undertook a full review of historic legacy agreements that led to a final US$721,000 final restructuring payment made against one agreement and an onerous contract provision on another resulting in a one-time write down for future expected losses of US$7mln with an associated US$4.1mln reduction in intangible assets to US$81.5mln.

Top-level domains
The .vip domain had a second strong renewal season of above 76% resulting in overall registrations for the region improving 15% from 728,000 to 836,000 year on year

The decision by the management team at Minds + Machines Group Ltd (LON:MMX) to stay independent increasingly looks a sound one.

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.

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

“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.

The strategic review prompted by bid interest 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, 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.

READ Minds+Machines receives ICANN approval to complete ICM acquisition

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.

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

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."

More recently (in September), the company published its results for the first half of 2018. They showed that registrations had risen to 1.5mln with particularly strong growth in the US, though there has been a recent slow-down in high-value one-off sales that will affect top-line revenues.

Turnover in the half year to June rose 22% to US$6.4mln (H1 2017: US$5.3mln) including a US$250,000, two-week contribution from ICM, the owner of the .xxx, .adult, .porn and .sex domain names acquired in May.

Renewals revenue rose 40% to US$3.4mln, with the proportion of ICM’s recurring revenue especially high at 96%.

Operating profits rose to US$661,000 (US$238,000) but underneath was a string of provisions and bad debt write-offs that pushed the group overall into an interim loss of US$14.6mln (US$424,000).

“The treatment of certain historic contracts, most notably those inherited by current management, has been addressed enabling a much clearer picture of the company's ongoing progress to be presented in future periods,” said Toby Hall, chief executive.

Going forward, renewal revenues should surpass the group's full cost base within the next 24 months, while new domain-name launches in China and the launch of .luxe means he is cautiously optimistic over full-year underlying profits.

“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”.

The most recent news concerns a strategic marketing partnership with imToken, the Ethereum cryptocurrency wallet provider.

Under the partnership agreement, imToken will be the first wallet provider to fully integrate the offering of .luxe domain names to new and existing customers as part of its product offering.

The ‘.luxe’ domain is designed to act as an identifier for a user’s Ethereum wallet, enabling them to use a simple website link, rather than a long and complicated string of characters that usually serves as a wallet key, to perform blockchain transactions, making the process easier.

Put another way, a user's 42 character wallet address can now be securely associated to a human-readable .luxe name of the user’s choice.

"Trust and transparency are at the heart of our service. Being able to now provide an easy-to-use human readable naming protocol to our users reinforces that sense of trust between counterparties. The fact that the .luxe domain can also work on the World Wide Web is ground-breaking, allowing the world of blockchain to become seamlessly knitted into everyday usage on the web," said Ben He, the chief executive officer and founder of imToken.

For his part, Hall was pleased by the speed with which the relationship with imToken had developed. It may have taken management almost a year to go it alone but it took them about a month to decide to get into bed with imToken.

MMX reported that 65 registrars – companies that lease out domain names – from around the world have expressed a wish to support the .luxe initiative at launch with 16 having already entered agreements to implement the Ethereum enablement of .luxe names via the ENS application program interface that hooks up a .luxe name with an Ethereum asset.

Hall said the interest in the .luxe domain had surpassed all expectations.

Quick facts: Minds + Machines Group Limited

Price: 6.5 GBX

Market: AIM
Market Cap: £59.74 m

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