CentralNic Group — A scaling player in online services

CentralNic Group is a leading global vendor of online services (management estimates that 12% of domains globally use at least one of CentralNic’s platforms), supplying the tools needed for businesses to develop their online presence, providing domain names, hosting, websites, email, website security and brand protection, as well as providing domain monetisation services using its proprietary technology stack.

CentralNic operates through two divisions:

Both divisions share characteristics including high recurring revenues, c 100% operating cash conversion and attractive customer stickiness, with significant opportunities for upselling and cross-selling. Key investment characteristics include:

In 2020, c US$400bn was spent acquiring internet traffic by online marketers, with demand growing at over 20% annually. Management estimates the size of the domain name market to be around US$5bn with 3% growth, while the value-added services related to and bundled with domains (website builders, website hosting, email software, etc) has annual revenues of an additional US$25bn, growing at 6% annually. Each of these markets is highly fragmented, with a large number of small and mid-sized companies addressing specific market niches or territories.

Operationally, management’s strategy is to benefit from structural market growth, building its marketing business as well as on the group’s underlying domain registry customer base, diversifying the group’s revenues through the cross-selling and upselling of services. Growth is supplemented by an acquisition strategy focused on consolidating a fragmented market, particularly targeting secondary markets where competition is less intense and acquisition multiples are lower.

In the short term, management expects the strong organic growth seen in 9M21 to be sustained at least for the remainder of the year. In the medium term, as investment levels plateau, management expects that CentralNic’s recurring revenue model and strong cash generation will provide operating leverage as the business scales. CentralNic has a full M&A pipeline and comfortable levels of net debt (30 September 2021: US$79m), with interest cover sustainable given the group’s profitability and cash generation (9M21: 113% adjusted cash conversion).

Benefiting from its FY20 investment programme, CentralNic continued to trade strongly, both during lockdown and afterwards. The company delivered 9% y-o-y organic revenue growth in FY20, 16% in Q121, 20% in H121 and 29% in 9M21, with contributions from all business lines. In its Q321 trading statement, CentralNic reported a further acceleration of organic growth driven by investment. 9M21 revenue reached US$282m (67% yo-y growth), with adjusted EBITDA of US$32m (46% y-o-y growth) versus 9M20 figures of US$168.5m and US$22.1m, respectively. The adjusted EBITDA margin of 11.5% was slightly below the 11.7% for H121, as growth continued to be led by the lower-margin Online Marketing segment. With adjusted operating cash conversion in excess of 100%, cash at period end rose to US$54m (H121: US$39.5m), with net debt falling to US$78.6m (H121: US$83.8m) despite US$12.8m spent on acquisitions during the period.

After a slowdown in M&A activity in FY21, we believe that the share price’s 50% rise over the last six months reflects a growing understanding of CentralNic’s business, a belief in the group’s underlying growth potential and reduced concerns over the level of debt-funded M&A. CentralNic has delivered a five-year FY15–20 revenue CAGR of 78%, with Edison estimating 59% revenue growth in FY21. As such, CentralNic offers some of the strongest growth among its peers, yet trades on P/E multiples of 17.4x in FY21e and 16.5x in FY22e. Whether we compare CentralNic to web services or online marketing, the shares continue to trade at a material discount to its global peers, with our net present value (NPV) analysis underlining the significant discount to theoretical fair value.

CentralNic was established in 2000, as a successor organisation to NomiNation, a company founded in 1995. CentralNic listed on AIM on 2 September 2013 and since listing has continued to grow through a combination of organic growth and M&A. Prior to the acquisition of Team Internet in December 2019, CentralNic’s main business was the development and management of software platforms to allow businesses to buy internet domain names (Online Presence), essential for websites and email addresses. The acquisition of Team Internet brought domain monetisation (Online Marketing) into CentralNic’s armoury. Supported by the acquisition of Codewise in December 2020, the Online Marketing segment now represents the majority of group revenues.

The company has been highly acquisitive, having bought 15 businesses since its initial public offering (IPO), including four in 2019, one in 2020 and three (to date) in 2021. In total, the group has spent c US$270m on acquisitions since IPO. As a result, revenue has increased from US$4.1m in FY13 to our estimate of US$384m for FY21, a CAGR of 76%.

In FY20, CentralNic employed c 405 staff.

CentralNic has a global business, with hundreds of thousands of direct and indirect customers from countries around the world. CentralNic has built its market position steadily, with comprehensive rights to web address inventory secured over 20 years. Today, CentralNic touches tens of millions of websites and domains, including exclusive rights to revenue-generation from traffic from 20m domains. Management estimates that more than 45m domains use at least one of CentralNic’s platforms (12% of domains globally). Not only does this highlight CentralNic’s reach, but it also underlines the opportunity for upselling services to customers with only a single touchpoint today. In total, over 100 suppliers globally depend exclusively on CentralNic’s technology, billing, cash collection and other services.

Customers include:

CentralNic is the number two domain-name reseller globally and number one in the new top-level domain (nTLD) market, with over 40% market share of nTLDs by volume (ntldstats.com/backend).

CentralNic saw strong growth in both Online Marketing and Online Presence in 9M21, as the group’s investment in new management, staff and systems accelerated organic growth, supported by acquisition-driven growth. Team Internet’s PubTONIC media buying business was the principal driver of the Online Marketing segment’s exceptional organic growth, together with strong traction for CentralNic’s privacy-safe online marketing technologies amid tightening industry practices (eg the ban on third-party cookies in Google Chrome and Apple’s App Tracking Transparency framework in iOS 14.5). New customer wins for the Registry business included JISC (March 2021) and Dot London (May 2021).

Given the difficulties of switching suppliers, customers in the domain industry tend to be very sticky, meaning client wins from other suppliers are relatively rare and customer losses are limited too. Despite this dynamic, CentralNic continued to win customers from its competitors due to a focus on expert service, close collaboration with clients, and feature rich, flexible and automated technology.

Significant customer wins in the Indirect segment (Online Presence) included Jisc and Intercap, as well as registry service contracts for the TLDs .auto, .beauty, .build, .car, .cars, .cfd, .cyou, .hair, .makeup, .quest, .skin and .uno. Major client wins in the Direct segment (Online Presence) in 2020 included Deutsche Telekom/T-Systems, Bauer Media, UNHCR, Ariston, Ferguson Plc, Argon Medical Devices, 1300 FLOWERS, ANZ Bank and Westpac Banking. In the Monetisation business (Online Marketing), notable new customer wins included Vodacom, the biggest carrier in South Africa, and Sovrn, a global player in e-commerce adtech.

In CentralNic’s Corporate segment, domains under management increased from 137,000 to 154,000 in 2019 (+12%), with an increase in client demand as well as new client wins.

CentralNic has combined the Direct and Indirect segments (domain name sales and value-added services) and henceforward will report on Online Presence, alongside Online Marketing, as its two divisions in the future.

CentralNic is a world leader in its Indirect segment, supplying domain names and other services to the largest and best known retailers of domains as well as a long tail of over 25,000 resellers. The segment includes CentralNic Registry Services, the world’s premier distributor of nTLDs, and SK-NIC, operator of the official country code domain for Slovakia. The segment also includes the reseller business, which allows retailers to procure and resell virtually any domain name in the world, through a single API, with a single invoice.

The Direct segment includes the group’s enterprise businesses, which service large corporations that view domain names as a form of intellectual property similar to trademarks. It also includes the group’s SME and domain investor-focused retail businesses. Revenues in the enterprise division were negatively affected by COVID-19 (as a number of clients postponed spending in 2020). However, the performance of these enterprise customers has since recovered, returning the segment to growth. The SME and domain investor-focused retail businesses grew during 2020, but only enough to balance the decline experienced in the enterprise market.

For 9M21, growth in domain name sales accelerated, but value-added services performed even more strongly, with overall organic growth for Online Presence of 9%, primarily driven by the group’s Wholesale and Enterprise businesses. In H121, the Indirect segment reported organic growth of 12% led by key Wholesale brands notably in North America. In the Direct segment, both Retail and the Enterprise businesses continued to grow, with 10% organic growth. The segment was also lifted by the acquisition of SafeBrands in January 2021.

CentralNic moved into internet traffic monetisation at the very end of 2019, with the acquisition of Team Internet, bringing proprietary technology that enables the sale of domain name traffic, as well as traffic from websites and apps. The acquisitions of Codewise (Zeropark, Voluum) in December 2020 and Wando Internet Solutions expanded the service offering to a full suite of online customer acquisition solutions, including data analytics. Supported by these acquisitions, Online Marketing now accounts for the majority of both gross (9M21: 59%) and net (9M21: 50%) revenues.

It is worth reiterating that none of CentralNic’s marketing platforms rely on third-party cookies, collect personal data or rely on Google Search for website discovery. In this respect, CentralNic’s marketing offering should be immune to changes in search algorithms, cookie regulation and privacy policies and, instead, expects to benefit from privacy restrictions implemented by Apple and Google Chrome, as traffic is displaced from other channels.

Online Marketing remained CentralNic’s fastest growing segment, with 9M21 organic revenue growth of 47%, a further acceleration from 28% in H121. 9M21 gross revenues rose 129% y-o-y to US$167m (9M20: US$73m), with net revenues of US$43m and gross margins of 26%. Growth was driven particularly by PubTONIC, Team Internet’s customer acquisition and media buying platform, as well as the acquisitions of Zeropark, Voluum and Wando.

Regionally, Europe and North America together accounted for the lion’s share of gross revenues (9M21: 84%). With the development of Online Marketing, Ireland has become the group’s most important jurisdiction (40% of FY20 revenue) with many major global companies choosing to base their operations in the country, with Germany (KeyDrive, Hexonet, Team Internet, Wando) and Australia (TPP Wholesale, Instra) prominent as the home markets for group businesses. Conversely, the importance of the United States, the home market for GoDaddy, has reduced from 34% of revenues in FY16 to 16% in FY20. This reflects CentralNic’s strategy of consolidating fragmented markets, rather than going head-to-head with the sector’s market leaders.

CentralNic completed one major acquisition in FY20, Codewise (Online Marketing), which follows four acquisitions in FY19: TPP Wholesale, Hexonet and Ideegeo (Online Presence), and Team Internet (Online Marketing). In FY21, CentralNic has completed three acquisitions: the US$3.7m (plus a US$0.7m earn-out) acquisition of SafeBrands (Online Presence), a French-based brand protection software provider, Wando Internet Solutions (Online Marketing), for US$13.0m in cash (including a US$6.5m earn-out), and the acquisition of White & Case Ltd (Online Marketing), a publishing network of revenue generating websites, completed on 1 October 2021.

CentralNic remains acquisitive, with a pipeline of identified acquisition targets. In H121, management considered the group’s M&A opportunities and, on review, intends to support both segments through further M&A, as well as considering acquisitions in potential new business areas.

Since IPO, the company has moved from a net cash position to a net debt position (Q321: US$79m), with growth largely funded by bonds (€105m raised between FY19 and FY21 through three tranches). Although CentralNic has received approval for a further €45m of bond issuance, which it has yet to draw down, management has indicated that it will consider the most appropriate funding at the time, be that cash (from the balance sheet or by way of a placing), share exchanges, equity or debt.

At its IPO in 2013, CentralNic’s main business was as a domain registry service provider, providing the Domain Name System (DNS) infrastructure and distributing domain names on behalf of registry operators, including two country codes, .LA and .PW. Since IPO, CentralNic has been highly acquisitive, completing 15 acquisitions worth c US$270m, at an average sales multiple of 1.0x and a 6.5x EV/adjusted EBITDA (Exhibit 6).

CentralNic’s M&A strategy has been to scale its existing businesses, adding domain names, new geographies and additional clients, as well as acquiring and then building the group’s domain name monetisation capabilities with the acquisition of Team Internet in December 2019. Both of CentralNic’s two businesses share similar characteristics, with high levels of recurring revenue and strong cash conversion, while complementing each other in terms of servicing online domains, with a broad range of underlying customers, SMEs, corporates, investors or publishers.

CentralNic has continued to strengthen its core management team, to ensure the business is able to scale and integrate future acquisitions successfully. Key members of the management team have joined CentralNic through acquisitions (eg Michael Riedl, CFO, ex-KeyDrive). Other notable recent appointments include Tracey Hickling as chief people officer, Robbie Birkner as head of the reseller division, Marc McCutcheon as head of retail and Dr. Pawel Rzeszucinski as head of the data and artificial intelligence (AI) group, established to improve customer service, optimise business operations reduce customer churn and automate detection of non-compliant customer activity.

Most recently, in September 2021, CentralNic appointed Carsten Sjoerup as chief technology & product officer to help CentralNic become a leading online services provider. Carsten is an industry expert in integrating companies and launching new products and joined CentralNic from GoDaddy where he was CIO, leading a team of 600+ across the US, EMEA and Asia. Prior to GoDaddy, he was CTO at Host Europe Group (HEG), acquired by GoDaddy in 2016, where he led the integration and consolidation of multiple acquisitions into HEG. At HEG, he was also in charge of modernising and automating the technologies and processes to ensure a unified platform.

In addition to building its team, CentralNic has strengthened its governance and oversight, with two new non-executive directors appointed in June 2021; Max Royde (managing partner at Kestrel Partners) and Horst Siffrin (partner at inter.services and ex-chairman of KeyDrive) were appointed to the board as shareholder representatives of Kestrel Partners and inter.services respectively.

In the short term, management expects the strong organic growth seen in 9M21 to be sustained at least for the remainder of the year. In the medium term, as investment levels plateau, management expects that CentralNic’s recurring revenue model and strong cash generation will provide operating leverage as the business scales. CentralNic has a full M&A pipeline and comfortable levels of net debt (30 September 2021: US$79m), with interest cover sustainable given the group’s profitability and cash generation (9M21: 113% adjusted cash conversion).

CentralNic is committed to building and developing its ESG approach over time and has already taken meaningful steps across multiple areas of its business. In particular, management highlights the following steps taken:

Further details on the group’s ESG initiatives can be found on pages 14–17 of the 2020 Annual Report & Accounts.

There are a number of factors that investors should bear in mind when considering investing in CentralNic:

In its Q321 results, CentralNic reported a further acceleration in organic growth to 29% for 9M21 (H121: 20% y-o-y organic growth), driven by investment in new management, staff and systems. As a result, the company reported 9M21 gross revenue of US$282m (67% y-o-y growth) and adjusted EBITDA of US$32m (46% y-o-y growth) versus 9M20 figures of US$168.5m and US$22.1m, respectively. This is an adjusted EBITDA margin of 11.5%, slightly below the 11.7% for H121, with growth continuing to be led by the lower-margin Online Marketing segment over Online Presence. With adjusted operating cash conversion in excess of 100%, cash at period end rose to US$54m (H121: US$39.5m), with net debt falling to US$78.6m (H121: US$83.8m).

Following the increasingly strong y-o-y organic growth that CentralNic has delivered in FY21 (Q121: 16% H121: 20%, 9M21: 29%), we upgraded our estimates following the Q321 trading update in October 2021, with our revised FY21 revenue estimates 28% higher than at the time of the SafeBrands acquisition in January 2021 (US$299.3m). Further details can be found in our Q321 trading update note, Organic growth continues to accelerate.

CentralNic delivered FY20 revenues of US$241.2m, a 121% y-o-y increase (FY19: US$109.2m). Net revenues increased by 78% y-o-y to US$76.3 (FY19: US$42.8m) and adjusted EBITDA rose 71% to US$30.6m (FY19: US$17.9m), supported by the four acquisitions completed in FY19 and the single acquisition in FY20 and led by the growth in Online Marketing. On a pro forma basis, adjusting for the acquisition of Codewise, the group delivered 9% organic growth in FY20, despite the impact of COVID-19.

The group’s strong growth resulted in an adjusted EBITDA margin of 12.7% (FY19: 16.4%), lower-than our forecast of 14.1% as a result of the continuing growth and outperformance of the lower margin Online Marketing segment, together with the c US$9m investment in technology and personnel in FY20. Management has previously stated that it is not primarily focused on margin enhancement, but will consider acquisitions that deliver growth in absolute profitability even if this is at the cost of lower margins. The FY20 reported loss before tax increased to US$9.4m, from US$6.6m in FY19, a 38% rise largely due to a US$6.0m increase in financing costs to US$9.8m (FY19: US$3.9m), with the FY19 comparator benefiting from a US$3.9m gain from FX movements, resulting in a reported EPS loss of 4.28 cents, a 15% increase on the FY19 loss of 3.72 cents.

Recurring revenue increased to 99% in FY20 (typically 90%+), with adjusted cash conversion of 115% (typically c 100%), in line with the group’s long-term trend.

Following our recent upgrades, for FY21 we estimate revenues of US$384m (59% growth y-o-y), with FY22 revenues of US$420m (9% growth) and US$454m (8% growth) in FY23. We assume FY21 adjusted EBITDA margins of 11.2%, delivering adjusted EBITDA of US$43m, while for FY22 and FY23, we assume adjusted EBITDA of US$48m (11.4% margin) and US$52m (11.4% margin) respectively.

Following the share and option awards announced in June 2021, we assume that CentralNic has 228.8m voting shares, with 22.4m non-voting shares held by the employee benefit trust (EBT), together making 251.2m fully diluted shares in issue.

Since acquiring Team Internet in Q419, CentralNic has wrestled with the optics of falling group EBITDA margins as the growth of the (lower-margin) Online Marketing segment has outperformed the (higher-margin) Online Presence segment. This issue could be resolved if CentralNic were to report on a net revenue rather than gross revenue basis. As such, we would not be surprised if management chooses to focus on net revenues in future reporting to address this consideration. Such a change would have the effect of reducing headline revenues while enhancing margins, bringing CentralNic more into line with its peer group.

CentralNic is strongly cash generative, with net operating cash flow of US$18m in FY20, which we estimate to rise to US$33m in FY21, US$39m in FY22 and US$45m in FY23.

Underlying cash flows are strong, with customers typically pre-paying for services in Online Presence and regular payments in Online Marketing, resulting in positive working capital. This means that operating cash conversion (normalised operating profit/net operating cash flow) on an annualised basis is c 100% (FY20: 115%, FY19: 98%), although with some variance on a quarterly basis. Management expects adjusted cash conversion to remain above 100% in the future.

In terms of the balance sheet, at the end of Q321 CentralNic had gross cash of US$54m (FY20: US$29m) and net debt of US$79m (FY20: US$85m). This leads to leverage of 15% for Q321 (FY20: 16%) and net debt/EBITDA of 2.5x (FY20: 2.8x). We forecast net debt remaining at or around US$79m for FY21, falling to US$60m in FY22 and US$31m in FY23, with net debt/EBITDA of 1.8x in FY21, falling steadily to 1.2x in FY22 and 0.6x in FY23.

The majority of CentralNic’s debt has been consolidated into a senior secured four-year bond, maturing in July 2023 offering a coupon of 7% pa above three-month Euribor (subject to a 0% floor), with quarterly interest. The latest €15m tap issue, in February 2021, was oversubscribed with the bonds placed at 104.5% of nominal value, offering a yield to maturity of 3.6%. A further €45m has been approved by shareholders but is as yet undrawn. Given its euro denomination, currency exposure on the bond is hedged at 3.3% below the level at 31 December 2020.

The proceeds from the bond have been used to provide financial flexibility over the medium term to enable management to pursue its strategic growth objectives, principally M&A. The bond is listed on the Frankfurt and Oslo stock exchanges.

Management stated along with its H121 results that it wishes to refinance the existing bonds (when they mature in July 2023), as this is expected to lead to a significant reduction in the interest rate payable. Management is committed to maintaining a net debt/EBITDA ratio below 2.5x, with interest cover above 4x.

We have looked at CentralNic on the basis of peer valuations, cross-referenced against a more fundamental net present value basis.

Firstly, looking at the NPV of future cash flows, we have derived a value of 216p per share, 44% upside to the current share price of 150p. This is based on an explicit forecast period from 2021 to 2030, before adding a perpetuity calculation with a 2% terminal growth rate and using a WACC of 7.7%. We have assumed a cost of debt of 4%, slightly above the yield on CentralNic’s bond issue of 3.6%. We show the sensitivity to different WACC assumptions in Exhibit 10.

Verisign (US), GoDaddy (US) and R22 (Pol) remain the core peers for Online Presence, but with the increasing sales out-performance of Online Marketing, which we expect to continue in the foreseeable future, we have also introduced an online marketing peer group, with a varied mix of companies from the UK, Europe and North America. It is worth noting that we have disregarded a number of the highest rated North American peers (Trade Desk, Applovin, IronSource, DoubleVerify and IAS), so as not to unduly skew the multiples.

Whether we compare the group to web services (Online Presence) or online marketing companies, CentralNic continues to trade at a material discount to its peers.

Disregarding Verisign, which we show above for completeness, the web services peer group in Exhibit 11 trades at average EV/sales multiples of 3x FY1 and FY2, with EV/EBITDA multiples of 9x for FY1 and 8x for FY2. In terms of P/E, the peer group trades at 23x for FY1 and 18x for FY2. We estimate that CentralNic will deliver 59% sales growth in FY21, meaning it offers the strongest growth in the group and yet trades on P/E multiples of 17.4x in FY21 and 16.5x in FY22, a discount to the web services peer group averages of 26% and 11% respectively.

With Online Marketing representing 59% of 9M21 of gross revenues and 50% of net revenues, we have introduced an online marketing peer group. In terms of peers, we have disregarded a number of the highest-rated North American peers (Trade Desk, AppLovin, IronSource, DoubleVerify and IAS), so as not to unduly skew the multiples, leaving a mix of European and North American companies, with a range of market caps and different business models. However, even after removing the most highly rated comparators, valuations remain above those for the web services peer group.

Average current year sales growth is 38%, with an EV/sales multiple of 4x in FY1 and 3x in FY2. Average EV/EBITDA multiples are 17x and 14x for FY1 and FY2, respectively, with P/E multiples of 35x for FY1 and 31x for FY2, approximately double CentralNic’s current P/E multiples.

Based on this analysis, despite a share price rise of more than 50% over the past six months, CentralNic still appears to offer a compelling blend of growth and value, with organic growth supported by continuing upside potential from management’s proven buy-and-build strategy. After a slowdown in M&A activity in FY21, we believe the re-rating in 2021 reflects a growing understanding of CentralNic’s business, a belief in the group’s underlying growth potential and reduced concerns over the level of debt-funded M&A.