GoDaddy’s aftermarket business continues to grow, and analysts need to understand how it works.

An analyst asked GoDaddy about its domain name aftermarket business on this week’s GoDaddy earnings conference call. GoDaddy credits increased aftermarket revenue for growing its topline domain name revenue and it’s important for analysts and shareholders to get an understanding of how the business works.

Aftermarket revenue is not like domain name registration revenue. Domain registration revenue is recognized over time and is recurring. If a registrar sells a domain for $12 this month, it will recognize $1 of revenue per month for the next year. More often than not, that domain will be renewed so the one registration continues to contribute to revenue for a long time.

But when GoDaddy sells a domain for $10,000, the best it can expect the next year is to get a standard renewal fee. It also recognizes the full amount upfront.

While aftermarket revenue is good revenue, analysts that are modeling GoDaddy’s business need to separate out what is recurring and what is not.

After the call, I contacted GoDaddy’s investor relations group to get clarity on GoDaddy’s answer provided during the conference call. Here’s the takeaway: the aftermarket business contributes mid-single digits to GoDaddy’s total revenue. Last quarter the company had revenue of $652 million, so if you assume about 4%-6%, that gives a number of about $25 million to $40 million in aftermarket revenue for the quarter.

GoDaddy’s domain revenue was $305 million, so roughly 10%-15% of domains revenue comes from the aftermarket.

The GoDaddy aftermarket has three main revenue sources:

1. Domains that GoDaddy has purchased for resale. Think Mike Berkens’ portfolio, Donuts’ portfolio, etc. that it has purchased and are now part of NameFind.

2. Expired domain names. This includes both domains expiring on GoDaddy’s platform as well as partners that send their inventory to GoDaddy.

3. Afternic and AfternicDLs sales.

The company counts revenue differently for each bucket depending on if it takes on the risk. Investor relations noted:

“[Domain aftermarket sales can be] recognized as either gross or net, depending on the set of circumstances with that partner. Each partner’s arrangement governs whether or not we take the risk of loss in the sale or we’re merely facilitating the sale. If we are placing any warranty/guarantee on the sale (assuming risk of loss) we’ll recognize the sale on a gross basis, scenarios where we’re facilitating the sale…we’ll record net.”

GoDaddy books the full amount of revenue if it sells a domain from its own portfolio. If it sells a domain investor’s domain through Afternic for $10,000, it only recognizes the $2,000 commission it earns.

Give GoDaddy credit for its smart approach to growing the aftermarket. As I mentioned earlier, Aftermarket revenue is good revenue, it’s just very different from what the company makes from domain registrations.

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