Q2 Preview: 80% Revenue Growth w Big Cashflow… There are many smarter people than I circling this name but I thought I would take a quick swing at where the business is at and what we will see when Q2 comes out because I feel like Q1 really understated where the businesses stood at from a profitability point of view especially with regards to the rebate program.
Let’s Dig In;
Revenue
TARGET: $7,100,000 & $2.38/Domain – given that there is an up to the minute counter on their website I think this numbers is pretty straight forward. Just note the quarter ended red hot adding 150,000 domains in a single month for one the best months in company history.
Would just point how the business reaccelerated during the quarter when I look at QoQ growth rates on a monthly basis starting in the month of April 7.98%, May 8.36% & June 10.58%. Bodes real well looking forward.
The revenue/domain is the frustrating part of the story but should be the last Q before we see a big acceleration in this figure. It's all about ancillary services to drive this number higher. Given that Hosting & Email were launched at the end of April in the Q this will be a MASSSIVE driver of this figure going forward. You could start to see the upstick in this figure in this Q but I am waiting for ancillaries to be in the fold for a full Q before baking it into my numbers. This figure could easily expand dramatically in the next 12 – 24 months as they go all in on ancillary services – not bad for upside optionality.
For example, if only 1% of domains pick up Email & Hosting this results in a 10% increase in quarterly Revenue/Domain KPI figure. - ALL MARGIN
Can’t complain too much though, business ended Q2 with a domain base that was up over 75% YoY.
Profitability
TARGET: $500,000 EBITDA – This number is still a bit of a black box given the rebate program but on a normalized basis this is my bogey. There is a lot to work through here.
The rebate program works as a reduction of Cost of revenue as a result gross margin expands. If I normalize Q4 & Q1 I get to a normalized gross margin of 15.5%. Let’s round down and call it 15%. We should see this number ramp higher quite dramatically in the coming Qs as ancillaries get rolled out with a margin profile 2 – 3x that of the core domain business. So much untapped operating leverage here.
Beauty of the business is there is minimal cash OpEx growth as the business begins to scale so on a percentage of Sales basis it should remain minimal and push the tight gross margin currently right down to the bottom line and generate EBITDA and cashflow.
The beauty of it we can assume slight growth in cash OpEx and they still put up 100% growth in EBITDA on a QoQ basis. The beauty of scale.
Using a 7% EBITDA margin gets me to that $500,000 EBITDA figure but I can easily make a case that this will be the most impressive figure to watch over the next 12 – 18 months. As ancillaries build you will see sequential QoQ expansion in EBITDA margin and I can make the case that you see a doubling of EBITDA margin to north of 12% by exit FY20. This makes a huge difference to profitability & cashflow.
Valuation
One of the fastest growing domain registrars at under 1.0x Run Revenue growing 50%+ YoY when you have GoDaddy at 4.0x Sales & Web.com taken out north of 2.0x Sales when it had zero net growth...
Give me just a 2.0x Sales figure for one of the fastest growth names in the space on a 2020 number and I can easily make the case for 1.00/share or more than 100% upside.
There are two companies currently in the small cap Canadian tech space that are just so mispriced relative to its direct peer group especially when you look at the explosive growth rate they are putting up relative to market leaders south of the border.
AT.TO – 1.0x Sales w 50%+ Growth vs TTD.US 16.0x Sales w 35% Growth
URL.ca – 1.0x Sales w 50%+ Growth vs GGDY.US 4.0x Sales w 15% Growth
SUPPORT A CANDIAN ENTREPRENEUR – BUY A MICROCAP STOCK
LONG