# CentralNic Group plc Revenue up 100% to £42.7m

- Link: https://www.directorstalkinterviews.com/centralnic-group-plc-revenue-up-100-to-42-7m/412774698
- Published: 2019-05-13T07:21:25+01:00
- Author: Giles Arbor

**CentralNic Group plc** ([LON: CNIC](https://www.directorstalkinterviews.com/company/centralnic-group-plc/cnic.l)),
the internet platform that derives revenue from the worldwide sales of internet 
domain names, today announced audited results ahead of consensus forecasts for the
year ended 31 December 2018.

**Financial Summary**

• Revenue up 100% to £42.7m (2017 £21.4m*)

• Gross Profit up 69% to £19.7m (2017: £11.6m*)

• Adjusted EBITDA** up 66% to £7.0m (2017: £4.2m)

• Cash balance up 66% to £18.0m (2017: £10.9m)

• Net interest bearing debt reduced by 66% to £2.5m (2017: £7.2m)

*Excluding premium domain sales – no longer a core activity of the Group

**Excludes impact of share based payments expense for options, premium domain sales,
foreign exchange, and non core operating costs

**Operational Highlights**

• Transformational acquisition of KeyDrive, which is integrating to plan:

o Doubled size of Group with additional staff in Germany, USA, and Luxembourg

o Augments CentralNic’s market strength, doubling customer numbers

o Diversifies business providing cross-selling opportunities

o Provides market leading technology which facilitates future acquisitions

o Cost synergies being realised

• Acquisition of GlobeHosting increased presence in Romania and Brazil

• SK-NIC integration successfully completed with pleasing contribution to the Group

• Global customer footprint expanded

• Recurring revenues stable at 90% (2017: 91%)

**Post year end events**

• Michael Riedl (former CFO of KeyDrive) appointed CFO of CentralNic

• Don Baladasan appointed MD of CentralNic to focus on integrations

• CentralNic awarded management of c. 680,000 domain names by ICANN

> **Commenting on the results, Mike Turner, Chairman of CentralNic Group, said:**
> “Results to date in the new financial year, together with the Group’s high percentage
> of recurring revenues, provide the Board with every confidence of meeting market
> expectations for 2019.
> Furthermore, the continued availability of attractive acquisition targets, coupled
> with the Group’s proven ability to source, complete, and integrate complex acquisitions
> around the world, provides an excellent opportunity to build a sizeable global
> business to rival the largest industry players. Given its equity position has 
> substantially improved and its current trading is favorable to market expectations,
> the Company is currently reviewing its capital structure for efficiency in view
> of its continued acquisition strategy.”
> **Strategic Report**

**Chairman’s statement**
 I am pleased to report on a year of outstanding growth
for CentralNic, following the KeyDrive acquisition. The Group made its most significant
step forward to date in its strategy to build a global domain name and web services
provider, which effectively doubled the Group’s size and completed its transition
to a virtually pure play recurring revenue business.

Both CentralNic’s traditional business and the newly acquired KeyDrive continued
to grow organic revenues with healthy profit margins, generating high levels of 
operating cash flow.

This transformational evolution of the Group is the result of enormous hard work
from our executives and staff, and I thank them on behalf of the Board and the shareholders
for their efforts. I also welcome the new staff and senior executives who joined
the enlarged Group through the KeyDrive acquisition, as well as the new shareholders
who joined the register as part of that transaction. Notably Alex Siffrin, the founder
of KeyDrive, has joined CentralNic as Chief Operating Officer, as well as taking
most of his consideration for the sale of KeyDrive in CentralNic shares, making 
his family office one of our largest shareholders.

Coinciding with the transaction, we extended our borrowing facility with Silicon
Valley Bank, whose continued support of the Group is also worthy of recognition.

The new financial year has started with continuing progress on integration, including
the appointment of the former KeyDrive CFO, Michael Riedl, to the Board in the position
of Group Chief Financial Officer. In addition, CentralNic’s former CFO, Don Baladasan,
was appointed to the new position of Managing Director, with special responsibility
for the integration of new acquisitions.

Results to date in the new financial year, together with the Group’s high percentage
of recurring revenues, provide the Board with every confidence of meeting market
expectations for 2019.

Furthermore, the continued availability of attractive acquisition targets, coupled
with the Group’s proven ability to source, complete and integrate complex acquisitions
around the world, provides an excellent opportunity to build a sizeable global business
to rival the largest industry players. Given its equity position has substantially
improved and its current trading is favorable to market expectations, the Company
is currently reviewing its capital structure for efficiency in view of its continued
acquisition strategy.

Mike Turner

Chairman

**Chief Executive Officer’s report**
 **Overview**

CentralNic enjoyed a successful year in 2018, with its organic growth supplemented
by the transformative acquisition of KeyDrive, which contributed to the results 
for the last five months of the year. Revenues for the year were £42.7m, a 100% 
increase over 2017, and EBITDA was £7.0 m in 2018, a 66% improvement on 2017 – excluding
the £3.0m revenue and EBITDA contribution made in 2017 by premium domain name trading,
which is no longer a core activity of the Group.

**Market and Strategy**

CentralNic’s reported revenues are now fourteen times higher than they were on listing
on AIM five years ago. Facing an addressable market estimated at over $30 billion,
we are committed to continuing the strategy proven to deliver this excellent growth,
combined with strong margins and cash generation.

As a foundation technology of the internet, domain names are governed by global 
standards, meaning that in every region of the world, the domain industry uses similar
technologies and exhibits the same fundamental business dynamics of recurring revenues
with highly predictable renewal rates and high cash conversion. CentralNic was formed
by combining a number of the most advanced technical platforms – developed over 
the past 20 years as the internet in the US and Western Europe became a ubiquitous
tool for business. Our core strategy is globalising these platforms, focusing on
growth markets – both through winning new customers and making earnings acquisitions–
and upselling additional technical services to our domain name customers.

CentralNic is the only Company among its peers to offer comprehensive and quality
services to all its defined customer groups – Resellers, Small Businesses, and Corporates.
For each of those customer types, CentralNic has developed and operates a highly
automated software platform. Our organic growth strategy includes continuing to 
win and retain new clients, but it also extends to introducing additional subscription
services to those customers.

CentralNic has sales and operations teams dedicated to achieving organic growth.
In addition, distinct corporate development and integration teams focus on sourcing
and completing acquisitions and integrating them into our operations. This achieves
savings while obtaining additional customers and services. CentralNic has executed
five acquisitions in the past five years. Similarly, KeyDrive, which CentralNic 
acquired in 2018, acquired the same number of businesses over the same time period.
There remain dozens of attractive acquisition opportunities around the world, and
CentralNic’s proven team maintains a healthy deal pipeline.

The economic drivers of the business remain strong. The internet now has four billion
active users, meaning at least two billion adults are yet to start using it. Whilst
micro-businesses are catered to, in some countries by platforms like Facebook, Amazon,
WhatsApp and WeChat, small businesses and corporations continue to rely on domain
names as the foundations for their websites, emails and online brand protection 
strategies.

Further to this, the five-year period of disruption from 2013 to 2018, when the 
market was flooded with low-cost domain names, is now behind us, with adoption of
these domain names only accounting for less than 10% of the market. CentralNic’s
most popular domains such as .com, .net and .uk continue to show robust growth both
in volumes and pricing.

**Acquisitions**

Three successful acquisitions contributed to CentralNic’s extraordinary growth in
2018.

On 2 August 2018, CentralNic acquired KeyDrive, a company with complementary technology
platforms and customer bases. This has created an enlarged Group that now owns and
operates proprietary software platforms for each major customer type for domains
and web presence services. Additionally, there was direct duplication of activities
within CentralNic and KeyDrive in some areas, creating opportunities for cost synergies,
which we are well advanced in realising. Due to the rapid integration of the acquired
KeyDrive businesses, which has included merging businesses and migrating customers
between businesses, the separate contributions of what were formerly independent
business cannot be reliably reported post-acquisition. The combined entities have
the number and breadth of senior managers to continue organic growth from a much
higher base than the Company had previously, as well as to accelerate the roll-up
strategy designed to make us a global player at scale.

CentralNic previously acquired SK-NIC, the manager of the exclusive country code
top-level domain for Slovakia, .SK, on 12 December 2017. SK-NIC supplies more than
390,000 domain names via 2,300 retailers, 99% of which are domiciled in Slovakia,
a country with one of the strongest growth rates in the European Union. .SK is among
the 50 most popular ccTLDs in the world, with an 84% renewal rate. Like most European
ccTLD operators, SK-NIC is privately held, yet it is virtually unique in that it
has a perpetual contract with the national Government. CentralNic retained the staff
and management in Slovakia, upgraded the software to its own proprietary platform,
and made strategic hires to better position .SK as a foundation of the Slovak digital
economy.

Finally, CentralNic acquired the business assets of GlobeHosting on 6 of September
2018, increasing its market share in the growing Romanian and Brazilian markets,
and adding the proprietary SSL certificate product GlobeSSL to CentralNiclN assets.

Through these acquisitions, CentralNic doubled its headcount, with additional staff
in Germany (housed in a purpose-built engineering headquarters near Saarbrh the),
the USA, Luxembourg, Slovakia and Romania.

In addition to the contribution these acquisitions have made to the continued growth
of CentralNic, they also represent a practical demonstration of our team’s ability
to source and complete deals around the world and successfully integrate them. We
continue to build a pipeline of acquisition targets that fit our criteria with a
view to making further acquisitions in the coming years.

**Operational Review**

Due to the rapid integration of the acquired KeyDrive businesses, which has included
merging businesses and migrating customers between businesses, the separate contributions
of what were formerly independent business cannot be reliably reported post-acquisition.

CentralNic experienced both acquisition-driven and organic growth across its three
segments, which reflect its main customer types of resellers, small businesses and
corporates. All three segments share the same virtuous characteristics of selling
subscription-based products and services with highly predictable renewal rates and
cash generation. All three benefited both operationally and financially from integration
activity.

Supplying domains to resellers became CentralNic’s largest business in 2018, growing
by more than 260%, principally as a result of the KeyDrive and SK-NIC acquisitions.
It provides the long tail of country code and new TLD domain inventory to 5,000 
resellers including virtually all the world’s leading domain name retailers, which
in turn resell the domains to their customers. Therefore, the growth from those 
retailers drives our reseller business forwards. CentralNic has retained its leading
position for the past five years, as a distributor of new TLDs. Additional growth
in 2018 was provided by new reseller wins and exclusive registry backend contracts,
notably with .icu and .ooo, which both ranked in the top 20 new TLDs by volume. 
Cost savings were achieved by the closure of KeyDrive’s Open Registry operation,
with the clients migrated onto the CentralNic Registry platform. Revenue from the
small business customer group grew by 24% in 2018 largely through the KeyDrive acquisition.

At year-end, c. 250,000 small business customers use CentralNic retailers to purchase
domain names for their websites and email services. CentralNic acquires customers
using search engine marketing and upselling them via email marketing and telesales.
Integration savings were achieved in 2018 by consolidating the supplier accounts
and connections between legacy CentralNic and KeyDrive businesses, combining purchasing
power and reducing duplication to improve margins.

CentralNic’s corporate customer segment services large corporations that view domain
names as a form of intellectual property similar to trademarks, which must be secured
and protected by brand owners. The over 300 corporate clients who have entrusted
their domain portfolio management to CentralNic include many S&P 500 companies and
household brand names. In the years to 2017, CentralNic operated a business within
the corporate segment trading in high priced premium domain names. In 2018, the 
strategic focus shifted from premium domain sales, and via the KeyDrive acquisition
it was replaced by BrandShelter – a company which manages large domain portfolios
for corporate customers. In so doing, CentralNic replaced a business based on one-
off transactions with a recurring revenue business with comparable revenues, while
providing the highest renewal rates, margins and growth rates in the Group.

The objective for us now is to maintain our revenue growth and healthy margins across
all three segments, while we rapidly scale the business up via continued acquisitions.

**Post Year-end and Outlook**

Trading in Q1 2019 was in line with management expectations. This included revenue
growth across all segments and hitting milestones in the integration of the new 
acquisitions. For example, to eliminate duplication, KeyDrive’s KS Registry clients
were migrated to the CentralNic Registry platform, while CentralNic’s EPP Gateway
clients were migrated to the KeyDrive reseller platform.

Additionally, we won new customers across the three segments, including being selected
by the internet regulator, ICANN (Internet Corporation for Assigned Names and Numbers)
for the bulk transfer of c. 680,000 domain names from a former registrar that was
no longer accredited.

We also upgraded our United Kingdom corporate headquarters and New Zealand office
in the beginning of 2019.

In the five years since it first listed, CentralNic’s revenues increased fourteen-
fold from £3.1m to close to £42.7m. The expectations for the business are to continue
on its aggressive growth trajectory, supported by continued demand, the planned 
introduction of new products and services such as cloud hosting, managed DNS and
online brand protection, plus a healthy pipeline of earnings enhancing acquisition
prospects.

Ben Crawford

Chief Executive Officer

**Chief Financial Officer’s report**
 2018 was a year of transformational events,
most importantly, the acquisition of KeyDrive SA in August 2018. Through this acquisition,
CentralNic augmented its market share across all its key business areas and now 
has access to a technology platform that will facilitate the integration of future
acquisitions. This was then complemented with the acquisition of GlobeHosting, a
Romanian/Brazilian hosting business. Management expects that the earnout conditions
will be met in full, testimony to the great performance of these assets.

The transaction was financed by an oversubscribed cash offering, raising £24.0m 
and an expansion of CentralNic’s facility with Silicon Valley Bank to £24.0m from
£18.0m. The founder and largest shareholder of KeyDrive took most of their consideration
in CentralNic shares. This demonstrates the continued support of management, and
both the equity and debt capital markets, in the ongoing prospects of the Company.
In consequence, equity at year-end was £61.0m, up 131% from the prior year’s £26.5m
balance.

Further, the Group enjoyed the full year effect of the 2017 acquisition of SK-NIC,
the operator of the Slovakian top-level domain .SK, augmenting revenue by £3.1m 
and EBITDA by £1.7m. At the same time, the volatile and unpredictable one-off income
from premium domain name sales faded from £3.0m to below £0.1m, in line with the
Group strategy.

In total, this led to overall year-on-year growth in revenue of 100% from £21.4m,
excluding premium domain sales, to £42.7m. The growth in the revenue line largely
flowed down to Adjusted EBITDA*, which increased by 66% to £7.0m (2017: £4.2m, excluding
premium domain sales). The overall Adjusted EBITDA Margin was diluted slightly to
16.3%, reflecting the integration of the lower margin KeyDrive business (2017: 19.7%
excluding premium domain sales). Foreign exchange movements were £0.6m favorable,
compared to £0.6m adverse in 2017.

The attractive cash generative profile of the Group continued in 2018 with the net
operating cash flow, before tax and one-off deal costs and replenishment of the 
premium domain inventory, being £16.1m (2017: £6.8m). Cash at the end of 2018 was
£18.0m (2017: £10.9m), an increase of 66% with Net Debt (including prepaid costs)
of £1.7m (2017: net debt £6.5m).

Key Performance Indicators 2018:

· Revenue: £42.7m (2017: £21.4m excluding premium domain sales)

· Adjusted EBITDA*: £7.0m (2017: £4.2m excluding premium domain sales)

· Loss after taxation: £4.9m (2017: profit after taxation of £1.0m)

· Cash Balance 31 Dec 2018: £18.0m (2017: £10.9m)

· Net interest bearing debt excluding prepaid costs as at 31 Dec 2018: £2.5m (2017:
£7.2m)

* Earnings before interest, tax, depreciation and amortisation, foreign exchange,
and non-core operating costs and revenues (acquisition costs, integration costs,
share option expense, settlement items, and premium domain sales)

Due to the rapid integration of the acquired KeyDrive businesses, which has included
merging businesses and migrating customers between businesses, the segment reporting
has been amended to absorb the businesses of the KeyDrive group. The new segments
are constructed around customer types, namely Resellers, Small Businesses and Corporates,
with each having distinct needs that are served by CentralNic’s proprietary SaaS
platform. For each segment, revenue and gross profit contributions to the total 
operating expenditure platform are determined. The reseller segment includes the
former Wholesale division, Small Business segment comprises the former Retail division
and Corporate segment absorbs the former Enterprise division.

**Reseller segment**

Three Reseller portals, namely RRP proxy, PartnerGate and Toweb, have been added
through the acquisitions in the year. This has contributed to revenue in the Reseller
segment increasing by 264% from £5.7m to £20.9m. Gross profit for the segment doubled
from £4.9m to £9.7m.

**Small Business segment**

The portfolio of Small Business portals was extended by domaindiscount24, Moniker.
com, and GlobeHosting. In total, the Small Business segment yielded revenue of £
18.3m, an increase of 24% over the £14.7m recorded in 2017. Gross profit in 2018
was £7.5m, an increase of 25% over the 2017 figure of £6.0m.

**Corporate segment**

Revenue in the Corporate segment was £3.4m, a decrease of 11% from the £3.9m reported
in 2017, and Gross Profit declined by 35% to £2.5m from £3.8m. Adjusting for the
significantly reduced premium domain sales, however, resulted in revenues for the
segment increasing by 290% from £0.9m to £3.4m and gross profit increasing by 207%
from £0.8m to £2.5m.

**Overhead expenses**

Group overhead expenses excluding foreign exchange, depreciation, amortisation, 
impairment and non core operating expenses increased 71% from £7.4m to £12.7m, of
which £4.1m is attributable to KeyDrive for the five months post-acquisition and
£1.1m to the full year effect of the SK-NIC acquisition.

**Earnings Profile**

The quality of the Group’s earnings remains an important strategic priority for 
the Group and its investors, as we increase the proportion of revenues derived from
predictable sources. This was one important factor in assessing the SK-NIC acquisition,
with all of SK-NIC’s revenues, earnings and cash flow derived from new registrations
and renewals of domain names. Recurring revenues is stable at 90% (2017: 91% on 
a pro-forma basis).

Adjusted EBITDA of £7.0m (2017: £4.2m) has been derived from the operating profit
of (£2.7m) (2017: £1.9m) after adjusting for the following items: a) depreciation
of £0.3m (2017: £0.1m), b) amortisation of intangible assets of £4.2m (2017: £2.2m),
c) fair value movement of investment of £1m (2017: nil), d) non core operating expenses
of £4.5m (2017: £2.0m), e) foreign exchange gain of £0.6m (2017: loss of £0.6m),
f) immaterial non core premium domain name sales in 2018 (2017: £3.0m), g) immaterial
amounts of share of associate income in 2018 (2017: nil), and h) share based payment
expense of £0.3m (2017: £0.4m).

Non core costs (including acquisition and other costs) totaled £4.5m (2017: £2.0m).
The acquisition-related costs, supporting the Group’s acquisition programme, included
a variety of deal costs for SK-NIC, KeyDrive Group, GlobeHosting and the accompanying
equity and debt capital market transactions.

Other non-cash expenses included the acquired amortisation of intangible assets,
totaling £4.2m (2017: £2.2m). This reflected the scheduled amortisation for identified
intangible assets of KeyDrive and SK-NIC. Further, in evaluating the fair value 
of the investment in Accent Media, the Group recorded a reduction of £1.0m. The 
value may be recovered, should the company’s financial prospects significantly improve.
The Jabella loan of £0.8m has been repaid to the Group in full.

Basic earnings per share of (3.82) pence (2017: 1.07 pence) has been impacted by
non-recurring acquisition costs, amortisation charges, and other significant non
core operating costs. Diluted earnings per share, at (3.82) pence (2017: 1.04 pence)
reflected the dilutive effect of the share options “in the money” at the average 
share price for the year.

Further details of the earnings per share calculations are provided in note 12 to
the financial statements.

**Pensions**

The Group created a defined contribution pension scheme in June 2016 in line with
the new auto-enrolment provisions in the UK. In Australia, the Group operates a 
superannuation scheme in line with statutory requirements, and the KiwiSaver scheme
in New Zealand, which is in line with the KiwiSaver Act 2006. In Germany and Luxembourg,
all staff are subject to the federal pension schemes and the Group contributes to
voluntary complementary pension schemes. The Group does not operate and has never
operated any defined benefit schemes requiring actuarial valuations.

**Dividends**

It remains the intention of the Group to generate income returns for investors in
the future as part of a progressive and commercially prudent dividend policy. However,
due to the continued expansion opportunities presented by the sector, the Directors
do not propose a final dividend in 2018.

**Group statement of financial position**

The Group had net assets of £61.0m at 31 December 2018 (2017: £26.5m). This increase
was driven by share issues for cash and for contribution in kind in the context 
of the KeyDrive acquisition. This was offset by the net loss for year, partially
mitigated by favourable movements of the foreign exchange reserve.

**Capital expenditure and investing activities**

The most significant investment made during the year was the acquisition of KeyDrive
SA, with further details on the fair value provided in note 25 to the financial statements.
In total, £46.2m of non-current assets have been added. £31.6m of this was attributable
to Goodwill, of which £29.0m was attributable to the KeyDrive acquisition. Software,
net of amortisation, increased by £6.4m and other intangible assets by £8.2m, both
largely attributable to the KeyDrive acquisition.

In line with the appropriate treatment for translation of a foreign operation into
the Group’s presentational currency, both the tangible and intangible assets are
translated at the closing rate, generating foreign exchange differences as presented
in notes 13 and 14 to the financial statements.

With the exception of goodwill, intangible assets are amortised in line with the
Group’s accounting policy. The carrying value of goodwill is tested annually for
impairment, while the Directors also consider other intangible assets and investments
for indications of impairment.

 

**Cash flow and net cash**

The cash flow statement for the Group includes two major themes: the entries related
to the financing and completion of the KeyDrive acquisition and the results of the
ongoing operations of the business, taking into account fluctuations in working capital.

Net cash flow from operating activities after tax was higher than the previous year
at £6.7m (2017: £3.8m). In both years, the net cash flow from operating activities
was in line with expectations relative to Adjusted EBITDA.

Investing activities were mainly related to the KeyDrive acquisition, which was 
completed in August 2018. The net cash outflow related to the KeyDrive acquisition
totalled £9.0m (net of cash acquired) in 2018 with a further £4.9m of earnout consideration
due up to 2020, whereas up to 85% of the earnout consideration may be settled in
shares.

**Banking facilities**

On 16 July 2018, the Company and Silicon Valley Bank entered into an amendment agreement
to amend the terms of the Silicon Valley Bank Facilities. The amount available under
the revolving credit facility was increased by £6.0m to £12.0m and the maximum amount
of the uncommitted ‘accordion’ facility was reduced by £6.0m to £9.0m. The term 
of the loans remains as stated above. The debt facility is secured over the material
companies within the Group. Further detail is provided in note 24 to the financial
statements.

The Group is in compliance with the maintenance covenant ratios and its payment 
obligations under the facilities agreement.

Significant accounting policies and critical accounting judgements

The Summary of the Group’s significant accounting policies is set out in note 3 and
the Group’s critical accounting judgements is set out in note 4 to the financial
statements.

**Group financial risk management**

The Directors reviews the financial risk management policy, noting that the Group
is exposed to deposit risk, credit risk, market risk, IT security, impact on society,
foreign currency risk and other risks arising from financial instruments. Further
details of the Financial Risk Management Framework are provided in note 29 to the
financial statements.

The Group’s finance function is responsible for managing investment and funding requirements
including cashflow monitoring and projections. The cashflow projections are reviewed
regularly by the Directors to ensure the Group has sufficient liquidity at all times
to meet its cash requirements and execute its business strategy.

The Group’s strategy is to finance its operations through the cash generated from
operations and where necessary, equity and debt finance, notably to support investing
activities.

The Group’s financial instruments comprise cash and various items such as trade and
deferred receivables. The Group had £18.0m of cash at the year-end, with interest
bearing financial assets bearing interest at fixed interest rates.

**Deposit risk**

Deposit risk is mitigated by the Directors setting policy that the Group only places
deposits with banks and financial institutions with high credit ratings.

**Credit risk**

The Group’s exposure to credit risk from trade receivables is relatively low, due
to the fact that the business has traditionally dealt with customers who often pay
at the point or sale or in advance. Where there are credit accounts, which is an
increasing trend in the industry particularly for the larger domain name registrars,
receivables are controlled through credit limits and regular monitoring.

**Market risk**

There is a risk that the market for domains for which the Group provides registry
and registrar services may not increase as quickly as expected or that the new TLDs
may not generate the revenue levels anticipated by the Directors. In either case,
the Group’s revenues could reduce below expectations with an impact on profitability.
The risk is mitigated to a degree by operating multiple lines of business themselves
exposed to many vertical markets and segments, the majority of which have very little
reliance on new TLDs.

**IT security**

If the Group does not prevent security breaches or becomes susceptible to cyber-
attacks, it may be exposed to lawsuits, lose customers, suffer harm to its reputation,
and incur additional costs. Unauthorised access, computer viruses, accidents, employee
error or malfeasance, intentional misconduct by computer “hackers” and other disruptions
can occur that could compromise the security of the Group’s infrastructure or confidential
information. The Group has created a resilient network infrastructure and Domain
Name System server constellation, with failover secondary systems to ensure critical
registry functions are maintained. The Reseller segment has been certified under 
ISO 27001/2013 for data security, thereby mitigating risk by adherence to international
best practice.

**Impact on society**

The Group has a positive impact on society by offering internet services in developing
countries, contributing to the United Nations Broadband Commission’s objective of
connecting the 50% of the world that is still offline with affordable internet. 
The Company can see little negative impact on society from its activities. Whilst
the internet itself adds a potential avenue through which fraudsters and other undesirables
can operate, the Company has stringent policies relating to its position as an enabler
of such traffic and at all times adheres to laws and regulations in each and every
jurisdiction, including working with regulatory authorities at all times.

**Foreign currency risk**

The Directors notes that the Group has predominantly traded in US Dollars, Euros,
GB Pounds Sterling and Australian Dollars, and considers the exposure to foreign
currency risk to be acceptable. The Group has held reserves in each of these currencies
to meet trading obligations as required. The currency risk is actively monitored
through a periodic review of inflows and outflows by currency, including an assessment
of the extent to which currencies are naturally hedged across the Group’s business
lines. Where this is not the case, consideration is given to the use of hedging 
instruments.

Given the Group does more than half its trade in US Dollars and the industry in 
which it operates is predominantly trading in US Dollars, the Directors are considering
to amend its presentational currency in compliance with IAS 21 to US Dollars for
all financial years commencing after 31 December 2018. Aligning the reporting currency
to the dominant trading currency will reduce the exposure to foreign currency risk
and facilitate benchmarking to listed peers.

**Other risk**

The Directors give due consideration to other risk factors as they arise. Particular
attention is attributed to the United Kingdom invocation of Article 50 of the Treaty
on European Union, commonly referred to as “Brexit”, as well as additional regulatory
requirements being attributed to business in the domain industry, by national or
supranational lawmakers, or regulatory bodies such as ICANN or the London Stock 
Exchange.

In the opinion of the Directors, Brexit carries limited risk for the day-to-day 
operations of the Group, as only a small fraction of the Group’s trade is to UK 
customers or from UK subsidiaries to EU customers. Only 4% of global sales are with
UK customers. Yet, the Directors are cognisant of more general risk such as market
turmoil or increased volatility of the Pound Sterling to other currencies.

Pertaining to regulatory requirements, the Group has assured that its subsidiaries
are compliant with the EU General Data Protection Regulation (GDPR) respectively
in their implementations to each pertinent jurisdiction law.

The Group is monitoring developments in relation to EU State Aid investigations 
following the EU Commission opening a State Aid investigation into the Group Financing
Exemption in the UK’s Controlled Foreign Company regime in October 2017. In line
with current UK tax law, the Group applies this regime. Based on its current assessment,
the Group does not consider any provision is required in relation to this issue.

Michael Riedl, Chief Financial Officer

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