Description

With 4.6 M domains from over 300,000 customers, NameSilo is a top-10 domain registrar (out of perhaps 3,000 globally). The company trades on Canada’s CNS as “URL” and U.S. pinksheets as “URLOF”.

As background, there are about 365 M domains registered globally: about 150 M are .com and 10 M are .org. About 100 M domains are held by speculators, mostly “domainers” (domain investors) or corporate entities. Per RegistrarOwl (a source of domain registrar statistics), GoDaddy (#1 globally) has 62.5 M domains and NameCheap has 12.9 M domains (#2 globally). Tucows has 9.5 M domains (#3 globally).

NameSilo caught our attention for its very steady sales (and domain) growth over several years and its recent improvement in gross margin.

BACKGROUND

A new management group (with a public shell called Brisio Innovations) acquired NameSilo in August 2018. The purchase price was C$15.7 M, including C$12.4 M cash. Since acquiring NameSilo in August 2018, the new management team grew sales from C$10.6 M in 2017 to a run-rate above C$40 M and grew domains from 1.8 M to 4.6 M today. NameSilo has customers in 160 countries with the following top countries for registrations: 1) U.S., 2) China, 3) Indonesia, 4) Canada, 5) Vietnam, 6) U.K., 7) Bangladesh, 8) India, 9) Australia, 10) Turkey.

Since 2017, NameSilo has grown from ~10 team members (mostly in Phoenix, AZ) to 30+ team members (scattered globally). The 30+ person team includes 18+ in customer support and 13+ in engineering/design. A CEO (with public markets experience) runs the public entity, and a CEO (with CTO/CEO experience) runs the operating subsidiary.

MANAGEMENT

CEO (of PubCo) Paul Andreola has a background as a private investor focused on Canadian microcaps. Of special note to VIC members, Paul was an early size investor in XPEL (when it was DAP-U on the TSX Venture Exchange) under $0.20 in spring 2013 and wrote it up on MicroCapClub at $0.36 in June 2013 (200-bagger since his initial report), a few months before it appeared on VIC. For more than ten years, he and his partner manually screen SEDAR filings, looking for Canadian stocks that meet their modified “CAN SLIM” criteria. He then interviews management, recently on his YouTube channel, “SmallCap Discoveries”. Over the last five years, he has helped with several public listings in Canada and has been a director of two Canadian microcaps, ImmunoPrecise (IPA) and Atlas Engineered Products (AEP.V; one of my old write-ups, which hit an all-time high yesterday). Paul owns about 8% of shares.

CEO (of OpCo) Kristaps Ronka has a 15-year background in software engineering as a CEO/CTO. The operating team owns 18.5% of NameSilo (Kristaps has 13.5% and his team has 5%), making the technical team highly aligned with shareholders. As CEO of the operating subsidiary, he doesn’t take a salary but collects cash distributions from his minority interest in the operating subsidiary (LLC) and owns 3% of NameSilo PubCo shares.

HISTORIC COMPETITIVE ADVANTAGE: LOWEST PRICE, LOW COST

A look at RegistrarOwl shows NameSilo as having the #1 lowest price to register a .com domain! Effectively, NameSilo is trying to be the “Wal-mart of Domain Registrars”. NameSilo is operating with high-teens gross margin (important note: gross margin includes most payroll and operating costs of the operating subsidiary; that means that gross margin is close to EBIT before PubCo costs). Being the lowest-price and one of the lowest-cost providers is arguably a competitive advantage in the brutally competitive domain industry: it gives a tailwind of new domains being steadily transferred over every month. Customer retention is 65%, and domain renewal rate has been 87% (customers often sell domains, which means customer churn is higher than domain churn). The high domain renewal rate is driven by the low prices, as well as the quality of service and strong online reviews.

Gross margin was in the high-teens (16.7%) when NameSilo was acquired and had a lean team (2018). In the subsequent two years, as NameSilo built its team, gross margin fell to 9.5% (2020). Now, two years later, with increasing benefit of scale (e.g. customer service, compliance costs spread across a million+ more domains), gross margin has returned to the high-teens, as evidenced by the most recent quarter (17.2%).

NameSilo seeks to improve its position of lowest price, low cost by improving organic search results and signing up more resellers. NameSilo has improved its SEO for terms like “cheap domain registration” (was 56 in past, now generally in the top 10-15 of search results). In addition, NameSilo is working with more resellers (especially in Asia), similar to how Enom sells domains through Shopify.

RECENT COMPETITIVE ADVANTAGE: NEW PRODUCTS

When NameSilo was acquired, the company had significant legacy “tech debt”. The CTO’s team took a couple years to re-tool the MYSQL and Java databases and integrate a second acquisition (NamePal). With a stable/strong code base, NameSilo can launch new products and perhaps white label other software companies’ products to its 300,000 customers. NameSilo was one of the first domain registrars to accept bitcoin, so there’s already some history of product innovation.

NameSilo has been adding new products such as web hosting services (launched late 2019), email products (launched late 2019), a free logo maker (launched early 2020), security products (premium DDS; launched 2020), a drop catch marketplace (“Catch.club”, for catching and parking expiring domains; collects a 3% commission, recently had a $150,000 domain sale), and a domain brokerage platform (“NameLot”; 8 competitors like GoDaddy’s Afternic and Dan.com).

Impressively, GoDaddy collects more than $1 in domain services (53% of sales) for every $1 spent on domains (47% of sales). For NameSilo, domain services represent only 7.1% of sales (3.1% for web hosting and email; 4.0% for domain marketplace) in the recent quarter. More penetration for some of its domain services, which often have 50-100% margin, could drive significant improvement in overall gross margin. To date, penetration of the new services has been unremarkable but the potential is there if NameSilo figures out to better cross-promote the new services. 

VALUATION

NameSilo has cash of C$1.5 M, bitcoin of C$0.3 M, and an investment portfolio mostly consisting of Canadian microcaps of C$4.7 M. There’s convertible debt of C$4.0 M. That implies a net cash/investment portfolio of C$2.5 M. 

Anecdotally, low-growth domain registrars have been acquired for 1.0x sales and medium-growth registrars have been acquired for >2.0x sales. NameSilo has run-rate sales of C$44 M, so it trades for less than 0.5x sales.

In late 2020, NameSilo was under LOI to be acquired for $30 M, or 1.2x 2020 revenue. The deal allegedly fell apart due to some sort of “culture” difference between the teams. A 1.2x multiple (at the low end of acquisition multiples) of run-rate sales implies a stock price of C$0.57, almost a triple from here. GoDaddy trades at 3.1x TTM sales (but is the #1 market leader and has ~65% gross margin).

Catalyst

Continued share repurchases (company has acquired almost 1 M shares for cancellation and could acquire up to 4.5 M shares with the current NCIB)

Institutional investors continue to accumulate shares

Continued improvement in sales, gross margin drives earnings growth

Acquisition candidate (under LOI in the recent past)