Demand Media’s Rightside reveals numbers and bet on fresh TLDs in SEC filing

Rightside’s growth is highly dependent on the success of fresh top level domain names.

Demand Media is spinning off its domain name business as a fresh publicly traded firm, Rightside. Today the firm filed documents with the U.S. Securities and Exchange Commission that give the public much more detail on the business.

Having reviewed the documents for much of this morning, one thing became very clear: a bet on Rightside is a bet on fresh top level domain names. The business is somewhat stagnant and is counting on revenue from fresh TLDs for growth.

Let’s take a look at the top line numbers.

In 2012, Rightside would have grossed $173 million as a standalone firm. Its adjusted EBITDA was $22.8 million with a net loss of $1.0 million. Its topline number was up regarding 8% from 2011.

For the 9 months ending September 2013, the firm had revenue of $139.6 million, adjusted EBITDA of $8.9 million, and a net loss of $5.0 million.

The firm notes two segments in its financials: Domain Services and Aftermarket & Other.

Domain Services includes its domain registration business, and will include the registry/newTLD business going forward. Aftermarket & other includes revenue from NameJet (a partnership with Web.com), parked revenue on its own portfolio of domains as well as partner domains through its domain parking service, and revenue from selling domains from its portfolio and from selling domains not renewed by its own clients.

Domain Services generally accounts for 70%-75% of revenue, with the balance coming from Aftermarket & Other.

Although the firm is reporting slight topline growth each year, it’s not really indicative of a growing business.

For example, so far this year its Domain Services revenue growth can be attributed to registry price increases that were passed along to clients as well as the incremental revenue from Name.com, which it purchased at the end of 2012.

It also counts on a single reseller – NameCheap.com – for 23% of its total domains under management. Its contract with NameCheap comes up for renewal at the end of this year. NameCheap has all of the negotiating power as it can threaten to flip the switch and run its own registrar operations or switch to another reseller platform.

On the Aftermarket & Other revenue side, it grew in the most recent period thanks to selling regarding regarding $4.7 million more of domains from its own portfolio than in the prior year. The domain parking business continues to decline.

This is why Rightside is so focused on fresh top level domains: it’s looking to them for growth.

Let’s face it, Rightside isn’t the only domain firm not growing like it used to. That’s why Rightside and many other firms are betting big on fresh TLDs.

In its risk factors, the firm points to its future growth being dependent on the success of fresh top level domain names:

A significant portion of our future revenue is expected to be derived from our registry services business. If we are unsuccessful in marketing and selling our gTLDs or there is insufficient consumer demand for our gTLDs, our future business and results of operations would be materially adversely affected.

In addition to a dwindling domain parking business, which has significantly affected aftermarket sales, the growth of .com registrations has slowed significantly. There just aren’t enough available good names for people to register, so they aren’t registering as many. Rightside hopes that fresh TLDs will lead to overall growth in the domain registration market:

As the number of domain name registrations increases and the number of available domain names with commercial value in existing TLDs diminishes over time and if it is perceived that the more desirable domain names are generally unavailable (and fresh gTLDs are not seen as a viable alternative), fewer Internet users might register domain names with us. If this occurs, it could have an adverse effect on our domain name registration revenue and our overall business.

Note the parenthetical part – Rightside needs the public to view fresh TLDs as an acceptable alternative to existing domains in order to grow its business.

Hence the spinoff’s name selection of Rightside. If the right of the dot doesn’t take off, then Rightside’s business doesn’t take off, either.

Here are some other tidbits from the filing:

* Rightside has purchased registry contracts for .futbol and .reviews from Donuts.

* Discloses some revenue from Name.com specifically. Name.com had $13.2M revenue for the 9 months ended Sept 30, 2012, with $1.4 million net income. Demand Media purchased it for $18.0 million.

* NameJet has sold more than 400,000 domains over the past five years.

* If you enjoy gawking at salaries, you’ll find the compensation details for Rightside’s top paid employees and directors in the filing.

* Rightside has 240 employees and plans to increase headcount 10%.