Minds Machines : Unaudited Interim Results

RNS Number : 3765N

Minds + Machines Group Limited

24 September 2019

Strictly embargoed until: 7.00, 24th September 2019

Minds + Machines Group Limited

("MMX", the "Group", or the "Company")

Unaudited Interim Results for the Six Month Period Ended 30 June 2019

Minds + Machines Group Limited (AIM: MMX), one of the world's leading owners and operators of Internet Top-Level Domains ("TLDs"), today announces the Group's unaudited interim results for the six month period ended 30 June 2019 (the "period").

The H1 results show a substantive improvement in revenue mix and cash generation from normal operations as a result of the focus on automated sales through the registrar channel and expanded renewal base that has benefitted from the ICM acquisition completed in June 2018.

Financial Highlights

• Registrations up 19% to 1.82m
• Revenues up 39% to $8.9m (H1 2018: $6.4m) benefitting from the full six month ICM contribution and 9% channel growth from the original MMX portfolio
• Underlying revenue mix significantly improved:

o renewal revenues 68% of total H1 revenues (H1 2018: 53%) covering 97% of all costs	(partner payments, cost of sales, and
operating expenditures)

• • non-channelbrokered revenue reduced to 10% (H1 2018: 25%)
• Operating EBITDA, net of auction revenue, improved fourfold (306%) to $2.7m (H1 2018 $0.7m) delivering H1 unaudited EBITDA of $2.6m compared to a H1 2018 EBITDA loss of $14.6m
• Net earnings of $1.7m compared to a H1 2018 loss of $14.7m
• EPS of 0.19c (H1 2018 2.07c loss)
• Cash inflows from normal operations (net of auction revenue) of $8.6m (H1 2018: $6.3m) with cash generation from normal operations up to $2.2m compared to $0.5m H1 2018
• Cash of $8.9m at 30 June 2018 post payment of $3m loan facility and $1.8m payment to exit onerous contract

Operational highlights		across the four ICM properties
· ICM integration completed, combined operations streamlined and the previous two-year decline
corrected		based activities
· Significant improvement in automated new sales through the channel, primarily driven by data-
· Innovation projects advanced, their primary focus being on generating second horizon revenue opportunities from the existing portfolio:
o expansion of .luxe R&D project so that a .luxe address can serve as a standard address		format across all blockchains as well
as the World Wide Web;	ICM portfolio that will allow trademark
o development of and ICANN approval for the new AdultBlock and AdultBlock+ service for the
holders to protect both their own exact match terms and the many thousands of variant look-alike terms that can be generated
through variant scripts to dupe consumers; and		names.
o development of a data driven expiring names service to better monetize non-renewed

• Geographic mix improved - US now accounting for 63% of billings, China 27%, Europe 9% and ROW 1%.

Post Period End and Current Trading

• Continued growth in normal DNS based registrations, up 6% since period end to 1.92m

·	Ongoing channel growth, billings currently trending 15% ahead of Q3 2018 with brokered sales in line	with the same period last year
·	Innovation initiatives progressing well:

• • 0.5 million identifiers reserved by the first two pilot wallet partners for onchain use within the .luxe project
  • Over 0.6 million addresses blocked through the first 106 AdultBlock+ sales in September
• .law shortly to be endorsed as an approved web address for lawyers in China
• the legacy onerous contract addressed with an in-principle agreement reached:

o $5.1m settlement to be paid in H2 from existing cash resources on completion of the legal	process
· £1.0m share buyback programme started as part of the Company's broader strategy to deliver	shareholder value

Toby Hall, CEO of MMX commented:

"We remain extremely encouraged by the progress year-to-date across the Group as we continue to deliver on our strategy of producing highly predictable, balanced revenue streams through organic growth, innovation and selective acquisition which is now resulting in healthy cash generation for the Group. It is in turn enabling us to settle the legacy onerous contract that has been a substantial cash drain on the business over the last five years from existing cash resources in the business.

"The £1.0m buyback, initiated on 26 July 2019, will continue whilst, during the second half of the year, we explore with our shareholders a more meaningful return of funds either through the introduction of a progressive dividend, a larger tender offer, or a combination of the two. Current trading remains positive and whilst the full year outcome will be dictated by the timing and recognition of revenue from new initiatives, notably AdultBlock, we are encouraged by the cash generation of the business and trading remains in line with market expectations.

"Against the backdrop of continuing momentum, Management would like to thank the Group's staff, commercial partners, shareholders and Board for their support over the last three years which has successfully allowed MMX to transition into a highly cash generative company enabling it to be increasingly valued on fundamentals, not sentiment."

A meeting for analysts will be held today at 10.30 at the offices of finnCap, 60 New Broad Street, London EC2M 1JJ. In addition the Company will be holding a Q&A session open to retail and other shareholders at 6 p.m. on 3rd October, at WeWork, 1 Poultry, London EC2R 8EJ. Investors wishing to attend should contact Belvedere Communications on: [phone].

*-ends-*

The information communicated in this announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No. 596/2014.

For further information please visit mmx.coor contact:

Minds + Machines Group Limited	Tel: [phone]
Toby Hall, CEO
Michael Salazar, CFO			341072
		Tel: [phone]
finnCap Ltd	finance	-	Stuart	Tel: [phone]
Corporate	Andrews/Carl

Holmes/Simon Hicks

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Corporate broking - Tim Redfern/Richard Chambers
Belvedere Communications Limited	Tel: [phone]
John West	2754
Llew Angus

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Executive Summary for the period ended 30 June 2019

Overview

As a registry, MMX has a growth strategy based on organic growth, innovation and selective acquisition. MMX generates its revenues through the online sale and renewal of names via registrars (the industry's retail channel) and the negotiated sale of high-value names via brokers. Historically, the strategy had relied heavily on brokered trades and one-off high value premium sales, combined with tight financial controls, to rapidly bring the business to maiden operating profitability in H1 2016. Management was fully cogniscant that in the long-term automated channel sales, and in particular renewals through the channel, should drive profitability. To put this into context, in FY2016, 58% of revenues were comprised of one-off brokered or premium sales, with renewals accounting for just 25% of operating revenue. By contrast, in H1 2019, renewal revenues accounted for 68% of operating revenue with non-channel sales accounting for just 10% of operating revenue, giving a much more predictable revenue profile and better quality of earnings. In H1 2019 renewal revenues alone now cover 97% of combined operating expenditures, cost of sales and partner payments.

Type of sale	H1	FY	FY	FY
		2019	2018	2017	2016
	Standard (channel)	13%	16%	17%	17%
Premium (channel)	9%	6%	11%	19%
Renewals (channel)	68%	60%	34%	25%
Brokered (non channel)	10%	18%	38%	39%

In H1 2019 sound management and disciplined data-driven activities have delivered a significantly improved mix and balance of revenues. Key focus areas in the period have been:

• assimilating the Group's first acquisition into the portfolio whilst simultaneously turning around the fortunes of the acquired properties;
• delivering balanced organic growth via the registrar channel across a broader set of properties within the original MMX portfolio; and
• creating exciting new commercial opportunities through innovation.

It is likewise the period where definitive progress was made in relation to resolving the legacy onerous contract that had impeded MMX's progress over the last five years and which resulted in the in-principle agreement to pay $5.1m in full and final settlement, which was announced post period end on 18 July 2019.

H1 2019 financial highlights

• Registrations up 19% to 1.82m;

·	Revenues up 39% to $8.9m (H1 2018: $6.4m) benefitting from a full six month ICM contribution and 9% channel growth from the original
	MMX portfolio;
·	Underlying revenue mix significantly improved with renewal revenues contributing 68% of total H1 revenues (H1 2018: 53%);
·	Renewal revenues now cover 97% of combined partner payments, cost of sales, and operating	expenditures;
·	Operating EBITDA, net of auction revenue, improved fourfold (306%) to $2.7m (H1 2018 $0.7m)	delivering H1 EBITDA of $2.6m compared

to a H1 2018 EBITDA loss of $14.6m;

• Net earnings of $1.7m compared to a H1 2018 loss of $14.7m;
• EPS of 0.19c (H1 2018 2.07c loss);
• Cash in-flows from normal operations at $8.6m (H1 2018: $6.3m); and
• Cash of $8.9m at 30 June 2018 post payment of $3m loan facility and $1.8m onerous contract payment.

H1 Operational Review

As previously outlined, Management's strategy for delivering value to shareholders is based on three core principles:

1. driving profitable balanced growth through organic business development and operational efficiencies;
2. innovation; and
3. accelerating scale and earnings through targeted accretive acquisitions.

Organic growth

In terms of organic growth, the focus in H1 has been on:

• completing the integration of ICM into MMX and streamlining the combined operations;
• reversing the previous two-year decline across the four mature ICM properties;
• growing channel sales within the original MMX portfolio; and
• resolving historic contracts.

Streamlining operations

In H1 2019, the integration of the ICM operations into MMX's was successfully completed at minimal additional cost (see Financial Review) and the back-end contracts for the ICM and MMX portfolios separately renegotiated. The renegotiated contracts will deliver combined savings of just under $0.4m in FY 2019 and approximately $0.6m in 2020 as well as provide significantly greater commercial flexibility in terms of product development moving forward.

Addressing the mature ICM portfolio

In spite of the many inherent strengths of the ICM portfolio, it was a portfolio that was known to have reached maturity and hence experiencing decline. To put this into context, in the two years prior to MMX's acquisition in June 2018, ICM's billings for H1 2018 were 16% behind H1 2017 at $2.8m, with the H1 2017 billings 4% behind H1 2016. Over the same two-year period registrations had dropped by 24%.

Against that backdrop, Management is therefore pleased to report ICM billings were stabilized at $2.8m in H1 2019 and the following growth metrics achieved within the ICM properties:

• a 20% billings growth ($0.2m) across .adult, .porn and .sex in H1 to $1.1m (H1 2018: $0.9m) compared to the 27% year-on-year loss in H1
  2018 across the same properties (H1 2017: $1.2m);
• a 43% increase in .xxx new sales billings through the registrar channel in H1 to $0.2m (H1 2018: $0.1m) which limited the $0.1m drop in
  .xxx renewal billings (H1 2019 $1.6m; H1 2018 $1.7m) over same period; and
• brokered sales outside of the channel maintained at a consistent level of $0.1m.

The turnaround within the ICM portfolio is the direct result of the improved data analysis and registrar engagement activity afforded by being within the broader MMX Group.

Separately, as discussed at further length within the Innovation section, the period was also used to develop the brand protection service, AdultBlock and AdultBlock+, and in parallel secure the regulatory approvals from ICANN, granted on 29 May 2019, to enable corporate registrars to effectively start selling the service to their customer-base beginning in September 2019. Management believes this service, combined with the other activities already in place, has the ability to drive ongoing growth within the ICM properties.

Driving growth within the original MMX portfolio

For the original MMX portfolio, the H1 focus has been to:

• continue growing new sales through the registrar channel across a broader range of properties to underpin its established recurring revenue base;
• continue broadening the number of properties generating revenues in China via the registrar channel whilst reducing the reliance on high value one-off brokered sales from a single property in the region;
• continue working through the contracts provisioned for in 2018; and
• continue the innovation-based activities to supplement organic growth through the channel.

Channel sales growth across the original MMX portfolio

As a result of the processes put in place, H1 new channel billings across the original MMX portfolio advanced 30% to $2.0m with new channel sales ahead of H1 2018 in all properties. Standard sales were up 31% to $1.2m and premium channel sales up 28% to $0.8m.

The H1 2019 drive in new channel billings has helped off-set the small decline in renewal billings (H1 2019 $2.2m v H1 $2.3m) resulting from the high $ value of brokered deals in H1 2018 on a small number of names that subsequently renewed at standard prices.

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Overall, channel growth (ie. combined new sales and renewals via the registrar channel) of 9% to $4.2m was achieved in H1 within the original MMX portfolio.

In terms of wider ongoing initiatives to monetise the portfolio via the registrar channel, in late June over 5000 previously reserved premium names were released to the channel and .law was introduced onto the GoDaddy platform. These initiatives did not impact H1 revenues but we expect them to start contributing in H2.

Broadening sales via the registrar channel in China

Historically, sales in China were heavily weighted towards brokered sales in a single property, .vip, and whilst steps had previously been taken to reduce this dependency, in H1 2018 one-off brokered sales from China still accounted for 53% of billings for the region (27% of Group billings) with new channel sales and renewals combined accounting for the remaining 47% in the region.

In H1 2019 Management is pleased to report channel sales (ie. new sales and renewals combined) accounted for over 69% of China billings. These sales were derived from multiple properties, H1 new sales in the region via the channel up 65% over the same period last year, standard billings doubling and premium channel billings up 36%. By contrast, brokered sales represented no more than a third of H1 2019 China billings and 11% of H1 Group billings.

The increase of regular sales through the registrar channel is reflected by the significant number of web pages now showing for MMX properties in the region - up 82% on a like-for-like basis on China focused search engines to 4.1m pages to the same time last year reflecting the ongoing adoption on MMX's lead property in China, .vip, where registrations increased 5% over H1 2018 to 0.88m registrations at the period end.

Brokered sales

Separately, brokered sales of $0.9m were achieved across multiple properties (notably .law and .luxe in addition to .vip) within the original MMX portfolio in H1 2019. Overall brokered sales were behind those of H1 2018 owing to a significant one-off brokered trade in H1 2018 in excess of $1.0m. Management expects healthy brokered trading to continue throughout H2 across the portfolio.

Improved geographic split and billings mix across the combined Group

As a result of the activities across the ICM and MMX portfolios, the Group has seen a significant improvement in H1 2019 both in terms of geographic split and billings mix as reflected in the two tables below.

Regional split improvement	H1 2019	H1 2018	H1 2017
US	63%	37%	35%
China	27%	51%	53%
Europe	9%	12%	12%
ROW	1%	0%	0%

Billings mix improvement	H1 2019	H1 2018	H1 2017
Standard (channel)	18%	16%	17%
Premium (channel)	11%	11%	17%
Renewal (channel)	60%	45%	54%
Brokered (non-channel)	11%	28%	12%

Resolving legacy issues

The period was also used to address certain historic contracts against which provisions of $9.1m were made in H1 2018. These consisted of an onerous contract provision of $7m and a bad debt provision of $2.1m against four underlying brokered contracts from 2017.

As disclosed in July 2019, an in principle agreement has now been reached to reduce the Company's obligations in relation to the legacy onerous contract provision through the payment of approximately $5.1m which Management believes will save the Company in excess of $3.0m over the remainder of the contract. Binding legal contracts and payment of approximately $5.1m are expected to be agreed in H2 2019.

As it relates to the $2.1m bad debt provision, $0.5m of the provision has been utilised in the period in relation to two contracts now viewed as unrecoverable with the inventory reclaimed by MMX. Separately, over $0.5m has been collected from the two remaining underlying contracts with revised payment plans entered into with the counterparties. As such no increases have been made to the bad debt provision, it now standing at $1.6m at the period end.

Innovation

In relation to innovation activity, Management is pleased to report the following progress in the period which it believes will contribute to revenue generation in H2 and beyond:

· the .luxe project has been expanded so that .luxe names can be associated to technically all blockchain addresses, the testing and implementation of the technology now taking place with two partners in Asia;

• the development of a data driven expiring names service being introduced to domain investors in Q3 2019 to better monetize non-renewed

names; and

· the development of and ICANN approval for the new AdultBlock and AdultBlock+ service that will allow trademark holders to protect not just their exact match terms across the ICM portfolio of top-level domains but also the many thousands of variant look-alike names that can be generated through alternate scripts to dupe consumers.

Management notes that a key part of the innovation activity is to monetise opportunities from the existing portfolio that sit beyond normal DNS based registrations that are recorded by sites such as ntldstats.com.

Acquisition

In terms of acquisition related activity, the primary focus in H1 has been on successfully completing the full integration of its first acquisition of ICM and putting in the place the required steps to return that portfolio to growth.

H1 KPIs

H1 2019 H1 2018% Change

Domains under management	1.82 m	1.50 m	19%
Gross Revenue - $000's	8,900	6,400	39%
Renewal Revenue - $000's	6,000	3,400	76%
Cost of Sales - $000's (2018 adjusted for IFRS 16)	1,600	1,700	-6%
Cost of Sales as a % of Gross Revenue	18%	27%	N/A
OPEX - $000's (2018 adjusted for IFRS 16)	3,100	2,500	24%
Operating EBITDA - $000's	3,300	700	371%

Domain names under management (DUMs) has increased by 19% to 1.82m at the end of H1 2019 compared to 1.50m at the end of H1 2018. This reflects the deepening relationships with the registrar channel and the use of data-driven promotional activities directed towards expanding the first year registrations of certain top-level domains while keeping in mind future renewal revenue.

The remaining KPIs are discussed within the financial review sections below.

Financial Review

IFRS 16

IFRS 16, effective 1 January 2019, impacts the accounting and reporting for certain leases. From a balance sheet view it requires certain leases to be reported as assets to reflect the value of the leased asset being controlled and used by the Company as well as recording a liability to reflect the fair value of future payments towards the lease.

The Company has taken the modified approach to adopting IFRS 16. As a result the balance sheet now reflects a 'right of use asset' of $2.8m related to leases for registry services and properties and a lease liability of $4.3m. The right of use asset is being amortised over its useful life and the lease liability is unwound as payments are made. In addition, the Company is required to impute interest expense against the lease liability which is charged to finance costs.

From an Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA) and net earnings view it removes certain lease costs from COGs and OPEX totaling approximately $0.4m.

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Revenue

Gross revenue has increased by 39% to $8.9m in H1 2019 compared to $6.4m in H1 2018. This reflects the growth of new registration revenue via the registrar channel, up 37% to $2.0m (H1 2018 of $1.5m) and the improvement to renewal revenues which have benefitted from the full six month contribution from the ICM acquisition. Against this growth, H1 2019 brokered sales were $0.9m representing 10% of Group revenue.

Renewal revenue

Renewal revenue has grown 76% to $6.0m in H1 2019 compared to $3.4m in H1 2018, directly benefitting from the full six month ICM contribution compared to 2 weeks in H1 2018. Renewals now represent 68% of total H1 2019 revenue (H1 2018: 53%).

Management's goal is for renewal revenues to surpass OPEX, Cost of Sale and Partner Payments within the next 12 months. The combination of the stronger focus on registrar channel sales, discussed in the Operating Review, and the established renewal base, including the benefit of the ICM acquisition, resulted in H1 2019 renewal revenue covering 97% (H1 2018: 60%) of OPEX, Cost of Sale and partner payments.

Expenditures

Cost of sales decreased in H1 2019 to $1.6m compared to H1 2018 of $1.7m adjusted for IFRS 16 in spite of the expanded portfolio.

Operating expenditures increased to $3.1m in H1 2019 from $2.5m in H1 2018 adjusted for IFRS 16, which reflects the integration of the ICM operations into MMX. During H1 2019 the back-end contracts for the ICM and MMX portfolios were renegotiated. The renegotiated contracts will deliver combined savings of circa $0.4m in FY 2019 and approximately $0.6m in 2020.

Cost of sales, now at 21% of gross revenue (31% in H1 2018), is aligned with management's KPI of 20% of gross revenue while operational expenditures of $3.1m are expected to be within Management's FY goal of $6.0m, the KPI set in 2016.

Operating EBITDA

Operating Earnings Before Taxes, Depreciation, and Amortisation (Operating EBITDA) has increased by 371% to $3.3m in H1 2019 compared to $0.7m at H1 2018. Excluding revenue from the resolution of TLD contention during the period, Adjusted Operating EBITDA has grown by 286% to $2.7m in H1 2019 compared to $0.7m in H1 2018.

The combination of increased revenue from the channel, the renewal revenue uplift from the June 2018 acquisition and operational efficiencies of the combined companies have contributed to the overall growth in Operating EBITDA. Management continues to look for ways to improve operations and reduce costs while investing in the growth of its personnel and growth of certain marketing expenditures that provide a measurable return on investment. These activities will create the base from which to continue building future profitability.

Profit/(Loss)

The Group's overall profit for H1 2019 has grown to $1.7m compared to a $14.7m loss in H1 2018. The loss in H1 2018 was primarily driven by non-cash charges relating to provisions and asset impairment totaling $13.2m plus one-off cash expenditures of $1.4m.

Cash

During the period cash-inflows from domain sales were up 37% to $8.6m (H1 2018 $6.3m) and cash generated from contested gTLD auctions was $1.6m. As a result, net cash generated from operations was $3.6m compared to cash generated in H1 2018 of $0.5m. Excluding the auction proceeds, net cash generated by operations was $2.2m in H1 2019 compared to $0.5m in H1 2018.

Cash balances at the end of H1 2019, post repayment of the working capital facility of $3.0m and $1.8m payment against onerous contract obligations, stood at $8.9m ($10.4m at the end of 2018).

Meanwhile restricted cash at the period end stood at $2.0m compared to $3.2m at the end of 2018. The reduction in restricted cash is the result of renegotiated agreements with partners and the release of ICANN letters of credit where contested gTLDs have been resolved.

Post period end, the Company earmarked up to $1.3m (£1.0m) for a share buyback which commenced 26 July 2019 during which period the Company managed to buy back 973,818 shares at an average price of 5.76p and a total cost of £56,059.99.

Balance sheet

Outside of cash, the key changes to the balance sheet in H1 2019 relate primarily to the implementation of IFRS 16 and the reduction of certain liabilities. Key changes include:

• a $2.6m increase in non-current assets to $87.9m (2018: $85.3m) which includes the $2.8m 'right of use' asset reflecting the implementation of IFRS 16;
• the collection of $0.5m related to contracts that formed part of the bad debt provisions;

·	a $1.4m reduction to the onerous contract provision reflecting payments made in accordance with the original agreement;
·	a $1.5m reduction in trade and other payables to $7.1m (2018: $9.6m) primarily related to the settlement of the $3.0m working capital
	facility during H1 2019 and the increase in registrar prepayments of $1.0m, relieving the Company of any outstanding debt from
	borrowings; and

• a $4.3m increase in lease liabilities as a result of IFRS 16.

Current Trading and Outlook

In line with management's expectations, H2 has begun positively as a result of the building blocks put in place in H1 with billings through the channel for the full group currently trending 15% ahead of Q3 2018 and brokered sales in line with the same period last year.

Management is likewise pleased with the Group's continuing progress in monetizing opportunities from its portfolio beyond straight DNS based registrations through its Innovation activity. To that end, it notes that over 0.60m underlying identifiers have already been blocked in the first 106 AdultBlock+ sales, the Group's registrar partners having only just begun introducing the product to their customers in September. Separately, approximately 0.5m onchain identifiers have now been reserved for registration within MMX's .luxe R&D project by the first two wallet partners as part of the freemium strategy being used in the pilot phase to enable wallet providers to offer their users a single simple address solution for the multiple separately addressed wallets per currency each customer has to use.

Management is also pleased to report that .law is set shortly to be endorsed as an approved web address for lawyers in the region. The Company's in-country commercial partners believe this will support the ongoing roll-out of the property in China.

As previously announced, management expects to pay the circa $5.1m onerous contract settlement payment on completion of legals in H2. We believe that this will once and for all set a clear line in the sand on this issue and will remove a substantial cash drain to the business.

As set out, the business is now on a much firmer footing with strong recurring revenues and increasing cash generation from operations. We will continue with the £1m buyback initiated on 26 July 2019 whilst, during the second half of our financial year, we explore with our shareholders a more meaningful return of funds either through the introduction of a progressive dividend or a larger tender offer or a combination of the two.

As the Group continues its onward momentum, management thanks the Group's staff, commercial partners, shareholders and Board for their combined support over the last three years which has successfully allowed MMX to transition into a highly cash generative company enabling it to be increasingly valued on fundamentals, not sentiment, moving forward.

Toby Hall, CEO

Michael Salazar, CFO

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