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Role of Finance Leaders is Specialized in TLD Launches

When I first entered the domain industry as head of finance and operations at .MOBI, the company had just acquired its licence from ICANN. I did a quick overview of the business environment through a financial lens.

My first impressions were predominantly positive. Sales were generated up front on a cash basis, which put registry operators in an enviable operational cash flow position. Also, there were no accounts receivable concerns due to the top-up nature of funding by registrars. Outsourcing the back-end registry operations meant that we could tie cost of goods sold (COGS) to activity.

But I had a steep learning curve before grasping the minutia of recognizing deferred revenue. Also, there was foreign exchange risk exposure because business operations were partly in the Euro zone while the domain business, like oil, was traded in U.S. dollars.

However, there are more subtle nuances that need to be grasped by the new entrant financial professionals. If they are to provide effective financial leadership to the business and support the management team, they'll need quality information for decision making in six key areas. I'll discuss three of them today and the other three in a subsequent post.

Cash Sales & Accounting Sales

While sales and COGS are generated on a cash invoiced basis, it's vital that the finance professional understand how to recognize the revenue/cost over the life of the domain term. Accounting rules can be complex. Dealing with multiple registrars and domain terms, not to mention numerous price points, will require time and patience for the new TLD financial leader to master. Simple excel spreadsheets won't do it if you want to have accurate budgets/forecasts — and that's before the added complexity of renewals kicks in.

Periodic Reporting on a Dual Basis

From the outset, management reports should be presented on a cash sales and accounting revenue basis. Accounting revenue basis is initially more conservative as revenue is recognised over the life of the domains and not in the month invoiced. However, note the dangers of only reporting under accounting revenue basis. Table 1 illustrates the cash sales vs. accounting sales of a sample TLD launched in Jan 2011.

Table 1 – Cash sales vs. accounting sales of a sample Top-Level Domain (TLD) launched in Jan 2011. (Click to Enlarge)

Cash sales dwarf accounting sales during the Sunrise, Landrush and early General Registration phases. However, as the business becomes more run rate, accounting sales exceed cash sales due to the "slow burner" effect of recognizing revenue of the Sunrise & Landrush periods over the domain's life. For example, reporting only on an accounting basis in December 2011 might give a distorted view of business performance for the month.

Promotions

Implementing sales promotion campaigns is a key way of increasing domain sales volumes, especially after the initial high volume launch activity passes. A good sales and marketing manager will put pressure on the management team to run regular promotions. It's vital that the finance team measure the success of each campaign and understand which tactics work and which don't. Otherwise, you could be throwing money away. The finance team must take a hands-on role in designing the numerical aspect to the promotion and rigorously perform post-event analysis for management. Your back-end registry provider will report volumes, but this will need to be supplemented by strong business intelligence reporting by finance.

In my next post, I'll discuss why finance departments must have a hands-on role in a TLD launch, forecasting renewal projections and foreign exchange risk management.

By Norbert Grey, CFO of Architelos – Mr. Grey has served in senior financial roles in both the domain name system (DNS) industry and in the technology and mobile telecommunications industries. Architelos, Inc. provides SaaS-based TLD managed services solutions, and strategic consulting for clients in the domain name (DNS) industry.  Visit Page

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Comments

"Water-falling" revenue and Y1 registration incentive pricing impacts, etc. By Jothan Frakes  –  Jun 30, 2011 10:37 am PDT

I agree 100% in the importance of involving financial expertise with someone who has 'domain expertise' in domain names in early stage discussions. 

This cannot be emphasized enough with respect to new TLD launches.

In 1997, my first operation of a TLD, we had to deal with "water-falling" the income to match the delivery of service for registration periods that extended beyond 1 year, pro-rata in 1/12 increments to overlap with our fiscal year, and also factor in grace periods (ie renewals in gTLDs have a 45 day grace period where a registrar can delete a name with a full wholesale refund where a domain presumptively renewed; there are threshhold 5 day add-grace, etc. and ccTLDs have other terms as well).

Also, many registries offer wholesale incentive pricing or rebates on year 1 of new registrations to grow adoption of their TLD and attract new registrations in the hopes of making that up in the renewals.

Some registries offer reduced year unit pricing for longer term registrations (ie.  1 year registration or renewal =$20.00; 5 year registration or renewal =$45.00).

There are things to consider beyond that, like differential unit pricing for transfers, renewals, and new registrations.

The sales incentive and marketing teams would drive accounting mad with all the different experimentation that they'd use to create attraction or promotion.

Bolt-on the complexity where vertical integration plays in to this.  Those units have a wholesale price that is different than a 'retail' price, and each potentially has a different cost-basis, because the end-user support, etc. is a higher cost to deliver for direct registrations.

There will be 'loss lead' TLDs that absorb certain portions of the domain registration against sales of related services like hosting, email, etc.

Premium name allocations, and auctions, sunrise, landrush, RFP or other types of prices also need to be weighed in with the financial planning team, because these also differ in the means of accounting.  A premium sale of $50,000 that is a 1 year registration with $20/year renewals for 9 years potentially has a different tax implication than a $50,000 premium sale that is a 10 year registration.

I could spend more time expanding out all of the learned experiences, but essentially your message is a very important one.... accounting has to push the broom behind the parade and react to these various situations unless they are involved early, preferably in the planning phase. 

Otherwise, accounting then needs programming/reporting resources and has to be constantly reacting to the issues, not to mention that they could have advised on more intelligent implementations (such as the 10 year registration term on a premium being potentially wiser).

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