Company lowers guidance on weaker demand from its domain portfolio.
Web.com (NASDAQ: WWWW) reported earnings yesterday and lowered its guidance for the fourth quarter.
One of the reasons for lowering the guidance is that the new supply of TLDs is causing domain investors to dial back large purchases of existing domain names.
In prepared remarks, Web.com CEO David Brown said:
First, in the domain business, while we continue to expect the recently expanded top-level domain environment to increase our ability to sell domains over the medium to long term, the increased availability of names has had a near-term negative impact on domain-related revenue. This is primarily associated with noncore domain-related revenue such as sales of premium domain names and bulk domain sales. While not a significant part of our overall domain business, it has historically represented several million dollars of quarterly revenue. But given the current environment, we now expect minimal contribution in the coming quarter. In terms of the core domain business, as we have said consistently, it provides an attractive base of high-retention recurring revenue, generating low- to mid-single digit growth.
Web.com, as owner of Register.com and Network Solutions, sells lots of domains from its domain expiry stream. It also holds on to a lot of these expired domain names for resale in the future. These sells amount to a few million dollars a quarter. This appears to be softening as new TLDs come out.
In the call Q&A, Brown elaborated a bit in response to an analyst’s question:
Yes. Let me be crystal clear on this. It really is not a — it’s not a gTLD issue at all. We continue to sell new gTLDs. It really has more to do with some of the premium domains and even domain bulk sales that we’ve historically done. There’s a marketplace out in the U.S. and around the world that buys domains and resells them or monetizes them, and we’ve seen that market get soft. We actually commented on this in our second quarter call that we were beginning to see softness. We saw it continue to soften further. Our belief is the reason the softness is occurring is that this marketplace is looking at all of these new gTLDs coming into place, i.e., there are more options available for people and they’re kind of stepping back away, at least temporarily, to see how things settle out. We continue to believe that this market could come back. But for the sake of conservatism, we have effectively taken this revenue out of our model for the fourth quarter because we can’t predict how long this behavior is going to continue.
A couple things are likely going on here.
First, people that might by a premium domain name through a registrar channel or marketplace site might be opting for a new TLD instead. They might also not see as much premium resale domain inventory in domain search results as it gets “crowded out” by new TLDs. I suspect this accounts for only a small part of the issue, however.
The bigger part of the problem probably has to do with the bulk sales from both the immediate expiry stream as well as Web.com’s domain portfolio. This is softening for two reasons.
1. As Brown stated, some people are waiting to see how new TLDs affect the .com resale market. This wait-and-see approach is affecting short term domain resales.
2. Some of the very people and companies that were buying lots of expired and portfolio domains from the likes of Web.com are new TLD operators themselves, and they’re sinking lots of cash into acquiring and running their new TLDs. This leaves less cash to buy other domain names.
This is not the first time a company has mentioned this resale weakness based on the introduction of new TLDs. Tucows, which has a similar expired domain business to Web.com, reported weakness 18 months ago before new TLDs even came out.