For quite sometime now I've taken a personal interest in Dark Blue Sea (DBS - aka Fabulous). So much so that about 12 months ago I purchased some stock in the company as I worked out that it was the cheapest way that I could buy into a generic well managed portfolio.So why is it that across the space of 10 months the stock has plummeted from a high of $1.15 to now languish at $0.30 per share? One of the great things about DBS is that being a publicly listed company they are obligated to reveal some quite interesting information that many of us are feeling in the overall industry. For instance, there has been a decline in revenue for the substantial portfolio of domains owned by DBS from earning $1.923m per quarter to $1.034m. As stated in the recent preliminary financial report a large contributor to the down-turn was the increasing value of the Australian dollar against the US dollar.
The chart below depicts the quarterly DBS internal revenues (purple bars) and the spot $AU/$US exchange rate at the end of each quarter (red line). As can be seen there was a continued climb in revenues up until Sept 07 (Q1, 2007) and this is despite a 19% increase in the value of Australian dollar. From Q1 to Q4 in the 2007 financial year there has been a decline of 42% in revenue after taking into account the exchange rate. So what's going on?
Ultimately only the management and board at DBS actually know what's happening but here is my educated guess. For the past 3 years Google (the DBS advertising partner) has been reducing its overall traffic acquisition costs from a high in Q1 '05 of 37.2% to a low of 29.1% in Q3 '07. From a Google perspective it makes sense to reduce their costs in order to provide better shareholder returns.
I personally believe that the squeeze on margins for the domain industry has been much greater than the overall traffic acquisition costs illustrate. Since the beginning of this year there has been anecdotal evidence that there has been a decline of up to 25% in the overall PPC revenue line for domains. As mentioned, the results recently published by DBS show a decline of 42%. Remember that these numbers do not take into account changes to the DBS portfolio of domains - they may have sold some domains.
What these figures do illustrate is how the PPC industry has slipped into a minimum recession and for all those that have severely leveraged their positions they may find this a difficult time. What of the nice things about DBS is that they have about $5m in the bank plus an additional facility of $5m available and they still don't carry any long-term debt.
What's really exciting about DBS is the increase in "Internal Domain Sales" from $0.857m in Q1 '07 to $2.779m in Q4 ‘07. It would appear that the Domain Distribution Network (DDN) that they have been working on for the past couple of years is really beginning to provide dividends in both revenue and diversification of revenues away from just PPC. In my opinion the Godaddy and other registrar domain channel deals will only continue to grow in effectiveness and revenue volumes into the future.
So why is the DBS share price down around 30 cents per share? The small capital market in Australia collapsed with on the back of the sub-prime crisis. As they say, if the US sneezes the rest of the world catches pneumonia. This has driven the share price down as reasonably substantial shareholders were forced to exit.
The downturn in PPC revenue combined with the climbing Australian dollar couldn't have happened at a worse time and I think that this combined with overall stock market jitters drove the share price south.
So what's the future for DBS ? Since July the $AU has fallen by 18%. This is always good for DBS that has the bulk of its expenses in $AU and its income in $US. I also would not be surprised if Google is placed under margin pressure as contracts are renegotiated by the various parking companies and self-owned portfolios are separated out of the agreements for the parking arms of the businesses. This should be good news for parking companies like DBS but the flow on effect to domainers could possibly be detrimental.
Many people have completed discounted Yahoo as a spent online advertising force but I wouldn't be surprised to see a resurgence in Yahoo over the next 12 months and this will bode well for companies like DBS .
So what am I going to do with my DBS shares? I'll probably acquire more as I believe that more than ever DBS shares are the safest and cheapest way to buy into a clean portfolio of generic domains. Not only that, it is profitably run by a great management team that have been strongly incentivized to provide results via their option plan. I believe that the DDN was a really smart move that helps diversify their revenue line but my instincts tell me that I wouldn't be surprised to see some strong revenue growth across the next two quarters in the PPC side of the business.
As always, I wish to clearly state that I am a DBS shareholder and that I would highly encourage you to seek professional advice in the event that you are considering purchasing DBS shares.
Domain wiki: Dark Blue Sea
Source: Posted on WhizzBangsBlog by Michael Gilmour -- Reprinted with permission -- September 17, 2008