Q3 Preview: 122% Rev Growth w Record EBITDA…It’s that time of the year again, time to bring it back to the numbers given we now have a finalized domain count for the quarter ended September 30. Seeing the sell off of more than 25% off the highs this is a rather timely post for an entry point or nothing else to instill confidence in the core business.
Let’s Dig In;
Revenue
TARGET: $7,518,738 or $2.33/Domain – which works out to continued strong growth on a QoQ basis driven by domain growth and the seeds of the ancillaries roll out. Big thing I am looking for here I think we finally have reached the nadir of Revenue/Domain which should start to drive higher.
Domain Growth – ending Q3 with 3,226,926 domains which is continued strong growth on a YoY, QoQ and a MoM basis. On a percentage basis this works out to 60% YoY growth, 7.4% QoQ growth and 1.39% MoM growth rate. The addition of a further 221,554 domains in the quarter is another strong quarter of domain growth that adds further scale to sell ancillaries into and increases the overall strategic value of the platform.
Ancillaries Growth – this is the holy grail to margin expansion for the platform, we can finally stop just talking about it and start to see it show up in the numbers with hosting and email launched for the entire Q we should start to see this higher margin revenue being generated. Might be too early for the company to break it out as a percentage of revenue but if we assume a continue build up in these services and a relative take rate to the 1 -2% level this bring is massive value (See prior Post). If I assume only a 0.25% take rate on hosting and email in the Q this adds close to $100,000 in high margin revenue to the top line and close to 4x the proportional contribution dollars relative to domain subscription revenue.
Revenue Per Domain – this is the most critical KPI I am following, I believe we have hit the nadir here and we should see much further upside driven by ancillary revenue. In Q2 Revenue/Domain hit $2.32/domain now that ancillaries have launched, we should be able to NameSilo drive further value through each domain. This Revenue per Domain metric is the number to follow to see this progress in not only ancillary pickup but the health of the entire platform.
Gross Margin/Rebate Program
TARGET: $1,202,998 or 16% - I think I could be conservative here as we get into the back half of the year and annual rebates start to trickle in but should hit in a big way in Q4.
If we look back to Q2 FY19 Gross margin took a big step up to 15.85% with no ancillaries and no annual rebates OR we look back to Q4 FY20 Gross margin was 19.29% with no ancillaries and annual rebates hit the income statement as a reduction in cost of revenue.
So with further scale, rollout of ancillaries which are associated with 4x the margin profile and annual rebate dollars beginning to trickle in I think there is a lot of upside to this figure. I could easily see a scenario looking out to Q4 and into FY20 where you start to see gross margins tick up closer to 20%. Pretty darn good.
Profitability & Cashflow
TARGET: $737,947 EBITDA or 9.8% - don’t look now but EBITDA margins continue to creep higher and higher. There could be some additional costs associated with new website design or ancillary rollout support but I have no way to estimate this figure so not going to include any value in here.
If I look to the model that NameSilo is trying to build in GoDaddy they still have room to expand EBITDA margins 50 – 100% still. If you look at GoDaddy SG&A spend the difference in spend on a percentage basis per domain and domain acquisition cost its not even comparable. The NameSilo business so much more efficient. They just have to scale.
STAT OF THE DAY – GoDaddy Spent $385,000,000 CAD on Marketing & Advertising in 2018 & added a comparable number of domains relative to NameSilo over that same period. – Yet NameSilo trades with Market Cap of $30,000,000 CAD. – You decide if NameSilo is strategically undervalued.
Once again, I have to hit this again this quarter. These asset light businesses are a thing of beauty as there is little to no CapEx requirements so all EBITDA flows right through from operating cashflow right down to Free cashflow. As a result, should be associated with a higher valuation and hence I you can look past the balance sheet headache that is the investment portfolio. At the current run rate, the business generates $3M in cashflow a year still growing its domain base 60% YoY and just beginning to roll out ancillaries.
Projecting Out
If look to FY20 I still believe they could hit 4.5M domain base by Dec 2020 as domain growth continues to grow as they are able to bring in a more diverse domain base as they now are offering additional services.
As ancillary growth drives further higher margin revenue, I think we have hit the nadir in revenue/domain and it inflects higher you could see revenue/domain push back up toward 2.40 – 2.50/domain per quarter.
On the profitability side, it works the same way with ancillaries, should drive EBITDA margins well into the double digit range looking to a 11 – 13% figure with further upside with each incremental service that is added to the platform.
Put it all together now FY20 Revenue of $39.5M and $4.77M EBITDA.
Valuation
One of the fastest growing domain gathers in the world now with scale delivering significant Free Cashflow with an underlying domain base still growing 60% YoY as ancillaries launch. I don’t know about you but I don’t think it should be trading down here <1.0x FY20 Sales when GoDaddy is trading 3.5x Sales.
Using a valuation metric of 2.0 – 3.0x Sales and a 65,000,000 share count & 81.5% Equity Stake I get to a target price of 1.00 – 1.50/share or 1.25/share at the midpoint or 212% Upside.
You add the optionality of further services, above industry domain growth or potential strategic value from a takeout and I think you could make the case it should trade at a premium to the peer group not 0.25x the value of GoDaddy.
The valuations in these small cap tech names with superior growth rates relative to their larger NASDAQ growth peers have been blown out to the point where they trade at 0.25x the value of these larger names.
Time to venture down market cap.
Cornerstone of my high growth, Canadian small cap tech portfolio
NameSilo Technologies – URL.ca
AcuityAds Holdings – AT.TO
Bewhere Holdings – BEW.V
Bluerush Inc. – BTV.V
Urbanimmersive Inc. – UI.V
LONG