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No Sugar for Go Daddy

Jonathan Berr

Similarities abound between Vonage, an Internet phone provider whose $531 million initial public offering turned into a trainwreck, and domain registration company Go Daddy. Like big Web advertiser Vonage, Go Daddy has made a splash with its marketing efforts, notably its racy Super Bowl television commercials. Neither company is profitable and both are jacking up spending to boost their brands.

"They are pioneers and familiar names in spaces that are very competitive and getting increasingly crowded," says Joe Lazslo, an analyst with JupiterResearch, in an interview.

But judging by Vonage's rough reception since its May 24 IPO -- the stock is down 28% -- pioneer status may not count for much nowadays in the stock market. That could mean Go Daddy will have a tough time when its deal comes out.

Holmdel, N.J.-based Vonage has been hurt by controversy over how it handled a program that allocated shares in its offering to customers. Vonage's IPO has attracted at least one lawsuit. But the bigger issue, observers agree, is that money-losing Vonage is beset by competition from more established players ranging from Comcast (CMCSA) to Verizon (VZ).

Scottsdale, Ariz.-based Go Daddy hasn't had a profitable year since it was founded in 1997. Last year, it had a net loss of $11.6 million. The company has "budgeted for increases in all operating expense categories in 2006, including significantly increased costs related to becoming a public reporting company," according to a May 12 filing with the Securities and Exchange Commission. The company declined to comment about its offering, citing a so-called quiet period.

Both Go Daddy and Vonage are throwbacks to the Internet bubble of the late 1990s. Back then, Wall Street was willing to bet that unprofitable companies would make money eventually -- and, moreover, that their shares would skyrocket early on, allowing early investors in the deal to make a killing.

But times have changed, which suggests Go Daddy may have its work cut out finding people to buy its stock.

Analyst David Garrity of Dinosaur Securities said he believes Go Daddy should "expect to receive a lukewarm reception at best."

Last year, Go Daddy had $139.8 million in sales, up 92% from a year earlier. As of Dec. 31, the company had about 2.4 million clients. It expects people to continue to flock to its service.

"The number of Internet users worldwide was estimated to be 1.2 billion in 2005, and is estimated to grow to approximately 2.2 billion in 2010, while only approximately 94 million domain names were registered worldwide as of Dec. 31, 2005," Go Daddy says.

But as the company continued to grow, so did its costs.

Marketing and advertising expense rose more than 250%, to $15.2 million in 2005, largely because of its Super Bowl advertisements, according to the company's filings. Selling and general administrative expenses jumped 96% to $50.3 million during that same time period, as salaries and related expenses for new hires jumped.

One reason why Go Daddy has needed to promote itself so heavily is that there is a huge number of companies doing what it does. The company's filing points out that the Internet Corporation For Assigned Names and Numbers, the international organization that oversees Web names, has 667 accredited registrars.

"There are relatively few barriers to entry in this market, so as this market continues to develop we expect the number of competitors to increase," the filing says.