Guest Post: Clarifying Clarifying Financial Questions: What New gTLD Applicants Need To Do To Pass Evaluation

This is a guest post by Phil Buckingham, CEO Dot Advice Ltd.

Mr Buckingham was involved at the start of the DNS in the UK in 1995, as CFO of Netnames, the pioneering corporate domain portfolio registrar.

Mr Buckingham  was involved in the Financial Evaluation process, served on ICANN’s GNSO Vertical Integration WG. Dot Advice Ltd provides applicant advice and develops fully integrated gTLD financial models, utilising the new vertical integrated market and SRSU brand models.

Here is the post:

It is certainly proving to be a long and winding road for the 1923 gTLD applications submitted to ICANN. Glitches, delays and now a very high percentage of applications will very shortly be receiving clarifying (financial) questions on 26 November. Currently a very high percentage of applicants have not scored the required 8 points to pass financial evaluation. This is the next huge challenge for applicants. Critical business decisions will need to be made by applicants to ensure they pass the Initial Evaluation. Undoubtedly it will cause further delays, and fundamentally impact directly and indirectly on other applicant business decisions, especially those in contention sets, which will be announced shortly.

There are seven evaluator panels. Financial, Technical, Geographic Names, String Similarity, Registry Services, DNS Stability. Each panel could issue clarifying questions.

Also there were over 11,000 comments. These were directed to appropriate panels. These could cause a clarifying question if a comment has the potential to change the score of an application.

Having been involved via an ICANN EOI (2009-2011) in the financial evaluation process, fully expecting to be a financial evaluator until conflicts of interest ruled out this opportunity I have taken a great interest in the roll out of ICANN financial evaluation process. Subsequently we have developed fully integrated gTLD models, over and and above ICANN financial model templates. I was an applicant for . royal, on behalf of the UK Royal Family. We subsequently decided not to apply.  Did we make the right decision?

A new gTLD update session at the recent  ICANN Toronto  meeting revealed some interesting and quite frankly alarming results based on the those applications part/ full processed by the financial evaluators.

ICANN and the evaluators have stated they were “surprised “by the scale of the clarifying questions that will be issued.

The Initial evaluation of 1930 applications (7 have since withdrawn) revealed as of 15 October 1114 application assigned to the financial evaluation panel. Of those 864 applications were still in evaluation, with 250 being completed.

In September clarifying financial pilot questions were issued to 41 selected completed applications. The responses received will impact on these clarifying financial questions. We have been given the opportunity to review a number of these clarifying financial pilot questions.

On 26 November many many, possibly up to 90% on certain questions, of the applications processed so far will be issued by the financial evaluators with clarification questions to their financial answers for question 45 to question 50.

We estimate that there will be 600+ clarifying financial questions. A small percentage of applicants are likely to receive CFQs on all six financial questions. This implies the applicant’s whole financial model won’t demonstrate financial capability to operate a Registry.

Many applicants will have scored a point score of 1 on a particular question, but not an overall pass. These CFQs will give applicants a one off opportunity to increase the score to 2, critically a score of 3 on Q50, which could result in a pass score.

Q49 on contingencies and the worst case financial template and Q50 on the letter of credit / irrevocable cash deposit seem to be the more problematic questions of the six financial questions.

ICANN’s two compulsory financial templates on Q46 and Q49 are very critically based on a cash flow model, not an accounting model.

Currently ICANN has announced that each application receiving CFQs has ONLY TWO WEEKS to respond and reply to the evaluators. Clearly the two week response time will not be enough and   MUST be extended.

So who are the financial evaluators?

Taken from the 2009 EOI, each member of an evaluation panel must have the requisite skills and experiences developed through business experience, industry knowledge, and education that will enable them to evaluate the financial strength of each applicant, and the viability of the applicant’s business model for operating the registry. Including

    • Full description of the registry services to be provided and the associated costs
    • Outline of anticipated capital requirements and the availability of funds to meet these requirements
    • Business and financial model , including pricing and revenue assumptions , expenses assumptions , capital projections
    • The availability and cost of capital   A resource requirement projection
    • Risk analysis, a disaster recovery plan and contingency provisions. In particular, securing a financial instrument to ensure funding of on-going registry operations for a period of time in case of failure.

What are the key issues the financial evaluators looking for?

Each application will:

        • Demonstrate financial capability
        • Cost structures in the application must be reflective of the applying registry only i.e. standalone and not dependent on another application.
        • The revenue and costs structures equate to the mission statement.
        • The mission statement equates to extensive market research.
        • Use of benchmark studies of the existing 22 gTLD Registries, in terms of growth forecasts, revenue projections, outsourcing costs.
        • A reconciliation of applicant forecasting accounting models with ICANN compulsory forecast template cash flow models.

 

What are some of the underlying basics that each applicant should follow?

Provide clear and concise answers

Provide a though and thoughtful analysis of the technical requirements to operate a registry and the proposed business model

Be conservative with your projections

Be realistic with your projections

Cross reference all numbers in the financial commentaries with those in the business models

Follow to the word the instructions: TLD Applicant – Financial Projections, Section by Section.

Follow to the word supplemental notes, best practice suggestions (issued 15 November 2011) question by question.

Answer all questions as set in the Final Applicant Guidebook. Fully understand the requirements re the notes, criteria, scoring range (i.e. fails requirements, meets requirements, exceeds requirements) question by question.

Be very clear and state all assumptions and why you made those assumptions at the time of your application.

What action points should applicants make regarding clarifying financial questions in the coming weeks.  What will be the impact on their business models in the future.

Assume your application(s) will start receiving CFQs on 26 November and throughout the financial evaluation process, until the projected completion in June 2013.

If in receipt of CFQs, via your TAS account on 26 November follow the advice and direction provided.  However consider the impact on your other financial answers and the compulsory financial templates.

Start putting in a place a strategy with immediate effect. Review this strategy in the light of the Prioritisation Draw due sometime in December 2012.

Critically review you application(s) in the light of further information. eg, now known competitors, other applicants in a contention set with your application(s), additional costs to be incurred, such a TMCH costs, compliance costs.

Consider the financial implications on your business model of (deliberately) failing the Initial Evaluation

Consider the financial implications of electing to go to Extended Evaluation.

Understand and consider using the new gTLD Application Change Request Process and Criteria

Finally, remember ICANN and the financial evaluators wish to give every applicant the opportunity to demonstrate financial capability to operate a gTLD Registry via a ten year contract.

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