New TLDs: Finance Dept. Role, Part 2 Published in CircleID, July 14, 2011, by Architelos CFO Norbert Grey

Last week I wrote about accounting, reporting and promotions. This week, I want to focus on the financial department’s role in launching services, renewals and foreign exchange risk management.

Launch of Services
In most businesses, the finance team usually takes a back seat during launch of services as business activity slowly increases in the months that follow. However, in the domain industry, with up to 30 percent of lifetime sales earned in the first three months of launch, it’s essential that finance takes a hands-on role from the start. In the ramp up to launch, finance professionals need to work very closely with the IT team to ensure registrar accreditation and integration is going as planned.

The financial group should be involved in testing. At launch times, it should monitor registrar balances very closely to avoid their running out of credit. It’s important to be ready to react at soon as necessary. The first day of each launch phase is integral to maximizing sales. The finance team must take the lead in oiling the machine that facilitates domain sales.

Renewals
For the most part, the success or failure of any TLD is decided by the health of their renewal rates. If you can achieve a good rate, your TLD then reaches a critical inflection point in its business life.

Finance has a business critical role to play in understanding renewals. This should be a priority from four to six months before the first renewal date. Deep analysis of renewal projections will be required for management. Promotions can be very effective at improving renewal rates, but the upmost care must be adopted in planning, executing and reviewing each renewal promotion.

A key challenge is getting true visibility on real renewal rates, as one cannot fully determine the actual rate until the 45-day auto-renew grace period is complete. Handling renewal reporting and providing meaningful reporting and forecasting can be one of most overlooked areas by a new entrant. For long-term financial planning purposes, accurately estimating renewal rates can be tough – benchmarking against established gTLDs might be a start, but be careful, as their name base is mature, and a new gTLD cannot hope to match their 72% renewal rate in early years.

Foreign Exchange Risk Management
If registry operations are based outside the United States, and consequently your business operations cost base, consider selling forward your net dollar exposure. Accurate financial planning should enable you to estimate what your likely net U.S. dollar exposure is for the year ahead. You should consider hedging this foreign exchange (fx) transaction exposure by entering into a fx forward contract to sell this U.S. dollar amount and then use the agreed forward rate as your budget fx rate. Otherwise, you leave your business exposed to oscillating U.S. dollar/home currency exchange rates, which could be a reason why you miss your commercial targets. Smart policies around this means that you can be agnostic of U.S. dollar fx changes going forward.

Finally, you will have to face decisions about which registrars receive credit advances from day one of the your launch. Registrars, in the vast majority, conduct business in an honorable fashion, but some registrars go bust. A key skill is learning which registrars are safe bets and which will string out the credit.

I have found the domain industry to be an exciting, ever-changing one for the financial professional. Detailed budgeting and forecasting is an absolute must if you are to cope with its idiosyncrasies. The most successful registry operators are the ones whose management teams value the importance of business intelligence, detailed operational reporting and managing business performance through informed decision making. To do that, they need timely and relevant financial and operational information.

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 provides Top-Level Domain (TLD) application guidance and front-office services for clients in the DNS and IP industry. Mr. Grey can be reached directly at [email protected].