Chit Chat Stocks - VeriSign (Ticker: VRSN) with Buyback Capital

Episode Date: August 17, 2023

VeriSign, Inc. (VRSN) is a technology company that provides domain name registry services, managing the infrastructure for the .com, .net, and other top-level domains, and plays a crucial role in maintaining the stability and security of the internet's domain name system. Listen as Brett and Ryan ask questions about the company, its business model, and valuation. Enjoy the show! ***************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney  Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Interested to see more of Buyback Capital's work? Find their Twitter here: https://twitter.com/Larryjamieson_?s=20 Contact us: [e-mail] Timestamps VeriSign | (2:22) Business Model | (9:04) Management | (24:43) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. This is our Thursday deep dive episode where we interview an analyst to discuss a single stock or industry. And today we're talking about VeriSign. It's probably one of the most important companies most people haven't heard of. It basically facilitates the plumbing of the internet is maybe a way to describe it. And we're talking with Larry Jameson, also known as Buyback Capital on Twitter. I highly recommend following him. He produces a lot of great research, great content. He also has a Substack, Buyback Capital Substack. Really, he's a good follow all around and a lot of funny material in there as well.

So highly recommend it. He knew this business really, really well. And he did a good job explaining it in layman's terms so that we can understand. I mean, at the end of the day, the core business for VeriSign is highly technical, but he did a good job explaining it in simplistic terms. So really recommend listening to the full thing. Lots of fun topics in this discussion. Talked about management as well.

Warren Buffett's the largest shareholder, so we get to that later in the episode also. But without further ado, here's our interview with Larry Jamison. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast.

Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in. And today we are joined by now second time guest, Larry Jameson. He also goes by the pseudonym Buyback Capital. If you want great memes, highly recommend checking him out on Twitter. And he also has funny and also good writing on his sub stack, Buyback Capital sub stack.

He goes through a lot of businesses there, but he also kind of adds a little flair of humor in there as well. And we're talking about one of the companies he's written up now before, which is VeriSign today. I guess before we get into things, Larry, welcome to the show. Thanks, guys, for having me back. It's always great to be on. All right. I guess VeriSign is probably one of the most important companies that most people don't know about, I think. so maybe can you give some context about how the domain registration industry actually works like like who are the players in it where does verisign fit in and then

how did they even get the rights to kind of be where they are yeah so um it's a pretty interesting uh story about how this even panned out like one of the things i always like to say is it like the um one of the things that's so different from the american uh economy or businesses that you can invest in is there are so many of these funny little uh monopoly type businesses that kind of if you had gone anywhere else in the world they would be run by the government but like in america a lot of them seem to be privatized which is so interesting but they also tend to be really good businesses um it's and it's really uh yeah secured a story so um early on in the foundation of the internet um a company called network solutions

basically over sort of a a nine or ten year period um was essentially the sole bidder to create the domain registry system with the united states department of defense and so in the very very early days they did registering of the domain names and they were also the registrar which is the part of the part of the setup that also sells the names retail directly to the public and so you kind of over time as the internet got more important from the mid 80s up until the mid 90s they were able to secure the domain registry rights with ICANN which is the non-profit independent body that regulates names and numbers on the internet and so network solution you know it got sued a few times by the

by regulators in antitrust cases to break up various parts of its business so sort of over time the domain registry and the being a registrar so selling the dot com and the dot net names directly to the public that got broken up and that was brought in competition and obviously over time the the number of domains also got larger so you've got dot com dot net you've got you know each country has their own ones so in australia there's dot com dot au dot org dot io all kinds of different things so there was competition brought in on that level as well um now where verisign steps into this equation they were founded in the mid 90s so 1995 by a couple of guys who had worked in private equity before and as best as i can tell their

plan really was to do like a consolidation play on the internet so they essentially rolled up a ton of different of different internet companies um and so in the early 2000s kind of in the last blow of the um dot com bubble they bought out verisign um in an all-stock deal that was like 21 billion dollars or something like that so um verisign was just one of the things that they had um they had rolled up um and um basically over time all the other businesses they bought um were very subscale or um went out of business uh poor quality and they they've been spun out um but essentially VeriSign ended up with this sort of but like in a stroke of good luck um and then you know through thick and thin they've kind of been able to um keep the domain registry

business over time. Now, how that works in practice now is that essentially they run the database of all the names and they have a service level agreement with ICANN, which basically demands that they have a 100% uptime keeping the .com and the .net domain names up. So, that's a pretty high level service agreement and they're very, very good at that. and basically the way that a name would make its way to retail is that it would be sold on through a registrar so probably you know most people listening to this probably would have registered a you know .com name or a .net name or something like that at some point in time and you'd buy these through like a GoDaddy or what's becoming more popular today is to buy them through one of

the um the retail website makers so if you go through like a wordpress or a squarespace or something like that they'll also um sell these as a registrar and so as part of the fees that pay to the registrar um you know i think at the moment that you know registering the dot com a name is about uh something in the range of nine dollars um and typically this hasn't always been the case but typically the registrars will they will pass along some of that cost to the individual purchasing the name historically it's been a loss leader for them so they would actually take a loss on the sale of the name but they'd kind of make up the money selling website features right and anyone who set up a little website will know that it can cost like you know even to set up something

very basic it can be you know 100 200 straight off the bat um and so over time i think that you know that's been less of a loss leader and they've actually been able to um add a markup to that as well um that's kind of like the short history and you know and um and how verisign you know fits into the puzzle at the moment yeah and it reminds me of the other company we talked about i can't remember how long ago it was but fico fair high state corporation it seems like a very similar business model as we'll get to it later. Similar margins, extremely high. But that kind of leads me into this next question here, which is their actual business model. What do they actually have to do? What do their employees have to do? And what do they have to perform for

their customers? And do they have any costs? Because it seems to me like reading it from a high level, they just have a license from the government to print money. Yeah, that's a very astute observation. They're basically just like a toll collector. And kind of the reason for that is like it's so interesting. They are basically the only privately owned business that runs one of the top level domain registries. So .com and .net, virtually every other domain name is run either by a nonprofit, a government, or in some cases, universities. um and you know for the most part running the top level domain registry um is not like a commercial

enterprise or it's not even really seen as a commercial enterprise like here um with the dot com dot au um registry system it's actually like really difficult to do like you have to have a um specific number like going through the process of getting a dot com dot au um is actually very difficult compared to getting a dot com which is ironic because it might be the other way around but they they really do do a good job with it um yeah look all they're basically doing is um they are reselling the dot com and the dot net um domains through essentially resellers and they are um that the service that they're providing like i mentioned before is just that they keep the um the domain the dns system up 100 of the time now that's um actually quite a a tall order like um

as part of my job we provide like some mission critical um software to the government and normal slas are like 99.99 like i think that's what most people will say so it leaves them you know you have some recourse when things go wrong because things inevitably do go wrong but these guys have done a really good job of keeping the database up and running and admittedly they have the most important one which is the dot com um you know there are it's something like six or seven times more dot com domains registered than than dot nets um so the dot com is the most important one it's the one that everyone call us around even if you're in a different country you're going to have it you're going to want to have a dot com um url and so um essentially that

they they have this service level agreement with i can um they've done a very good job at that they've built a proprietary um system called atlas so they've had this for quite a while going back into the 2000s which is a very highly scalable system um that has you know virtually never crashed and it it's maintaining hundreds of millions um of these names so that's um it's it's a decent service they provide but like you mentioned this doesn't really take a lot of employees or um uh even like capital capital expenditures at this point they've kind of they built the system um every year they kind of shave a few more employees off um so if you look at the FTEs it's just kind of gradually gradually gradually getting lower and lower as they

automate virtually all of the business um the the the difficult part if you will is that their agreement with ICANN sort of comes up for renewal every I think it's between five and ten years and so you do need some business development people um on board to kind of keep the uh the government at bay um and um historically you know um in you know management is kind of incentivized towards um optimizing uh their margins and um their cash flows so um certainly the kind of last 10 years where they they've gone from like being a real hodgepodge of different businesses to now where they essentially have really only have two businesses but in fact only really have one um you know that that has taken some some management so you need need someone to

keep the the ship going steady and to make sure they can flick up the price it's every couple of years yeah let's talk about that contract what look what's baked in there kind of what you mentioned the price increases what's their kind of expected growth rate and then i mean the price increases is probably one element of that but how about the actual like dot com websites registration is is that growing as well yeah so historically the the number of um um dot com uh registrations has grown about two percent every year um now the pandemic was a very interesting period of time because like most things it kind of uh rapidly sped up anything to do on the internet so you know when everyone was locked down and they said you couldn't go

anywhere you know maybe and you know you're you're enterprising or you're a bit bored um lots and lots of people started a website or an online business and so the number of domain registrations um went up in a fashion that was very uncommon so historically it's just been very very steady one to two percent growth every year pandemic sort of sped that up i think um well in excess of two percent and now on the back end of that um we're seeing slowdowns uh in the number of domain registrations so um there was kind of like i think there was a day where the stock was off like 10 11 something like that three quarters ago where they um announced a slowdown quarter on quarter and then in the latest quarter um most geographies have been pretty good in terms of

their volume growth all geographies want to get a dot-com registration in tandem with their own local one um but china's been like a real slow like massive slowdown um and it's not really that clear why that's the case um maybe it's like part nationalism maybe the you know the government's somehow throttling people's ability to do that but china's like a real black sheep i think over the long term um uh it's you know i think they you know that there's plenty of ways that it can be expanded so i think as time goes on and you know internet technology becomes more More the necessity to be able to, you know, use subdomains, you know, the advent of, you know, people like, you know, Substack and stuff like that who have to register a whole bunch of subdomains for the people who are using different specific URLs, all that kind of stuff. And just the internet in general being, you know, a good place to do commerce or have a site is, I think people have found that valuable for a long period of time.

I can't see it, you know, not being valuable going forward. Do they get like the $9 on every subdomain for a company like Substack? um uh they might have a slightly different deal but there are cases where um so in the company i work for we build um websites into subdomains for people so if it was like you know www.brisbane.com.au and they wanted to build like a little i don't know a booking page on a subdomain with some tech pasted in it they might register www.booking.brisbane.com.au and you do pay for that or sometimes it can you know pan out what your deal is with your your registrar so i don't have all the granularity on that but like sometimes yes i i'm guessing sometimes no

it's definitely not hurting them yeah no yeah we'll talk about the incremental margins on this but one risk that i was thinking of that maybe has come up from time to time i know you mentioned in your write-up which again you can find on the sub stack that will link in the show notes it's the mobile risk i think this was a concern probably in the earlier age of the smartphone but there was concern that everything was going to go app-based you don't have to register a domain there how um has that played out did it affect anything at all yeah i think um i think it's it's a little bit asymmetric right because um like every app needs to every successful app will also have basically have a website too so like threads you know like that's only an app

at the moment but they have they have to have a website because that's like an on-ramp to get the app um obviously you know if you capture a lot of people over time you know that could be like less but i mean the way the way the western internet has panned out has not been uh the way that like the chinese internet has panned out where we where the people kind of coalesce around like a super app like we don't really have a you know a we a we chat or wei xin um you know like the super app is like the the operating system for the phone um and so yeah look um i see this in you know e-commerce sites that that we run um mobile is still not as charismatic a platform for certain types of e-commerce that um desktop is so in these e-commerce sites that i see the

back end of it's like uh one third um mobile and then uh you have like a big kind of heavy weighting towards desktop because um people aren't really going to spend like five grand on their mobile phone i think um like high yield transactions that kind of stuff people are very wary about doing that um on their phone and that's you know partially that's because there haven't been apps built that really like you know um cater to that but you know we haven't we haven't seen that and so um you know for nine years now there's been very steady growth in the number of urls and i think you know kind of like the app economy works hand in hand with um with with um you know having a domain yeah that totally makes sense what so they have about 70 percent

EBITDA margins. That's pretty similar to, again, like I mentioned, the FICO business that we talked about. It's extremely high margin, as maybe any listeners can tell when we talked about how there's very little cost. Do you think there's room for this to continue expanding? Because it seems like they just have this small fixed cost base. Employees are going slightly down, but they have this contract where they can continue to raise prices. Yeah, exactly. So it's probably where, sorry, I think we probably skipped a little bit over the contract. I might just touch on that quickly and then answer um the the contract with i can so like i mentioned it comes up for renewal every um five or ten years and basically that contract allows them to raise prices seven percent

four years out of every six um and so if you average that out that's about 5.6 percent um and then you know volume growth in in the area of two percent um and so the way that contract can be terminated is if VeriSign does not keep their end of the bargain in terms of their service level agreement. So if they ever had a like a big outage in their database that would be cause for ICANN slash the government to terminate the agreement. Basically every time they come to renew this contract the government or ICANN will use that as a like a leverage point to kind of get concessions out of them so in the last round of negotiations the government got them to spend like 25 million dollars on like business development or something it was kind of like trying to give a few goodies

to all the people who complained that their uh renewal costs for their url were going up like you can see how some people would be upset if you're just running a you know a hobby site that's about you know a blog for your dog or something like that you can see how the ever increasing prices might be frustrating especially if you've been running that website for a long time like you might have been paying a couple of dollars or something like that back in the day and now if the if your register is like you know actually adding a markup you could be paying you know fifty hundred dollars a year kind of thing to to renew your site um and so you know political pressure gets gets brought to bear so there's been several times in the company's

history where the government has tried to intervene and like we might get to this later but the last really significant one was in 2014 when the US federal government basically said that they were going to step back from supervising ICANN which most people saw as a way to kind of like break up the existing system. Now that didn't pan out mostly for the reasons that I've said that VeriSign's built like a very, very, very good system and they provide a very, very good service at what I would say is a low cost, but other people will disagree. In terms of the margin structure, I think they just kind of, you know, you won't have dramatic changes in the margins. Like the initial, when Verisign was going through its kind of period where it was spinning out, you know, underperforming businesses and they had tons of employees and they had, you know, more fixed assets than they needed. And they were able to really get rid of those and transition to what they're doing now, which is basically just running the database and raising prices.

you had really dramatic changes in the margin levels then because the business was just transitioning to this kind of pricing power led uh toll booth if you will and um and so now you'll probably just get very incremental um you know drift in the margins upwards nothing dramatic i mean you're already at 70 probably wouldn't expect anything dramatic but essentially you're running the same system um you know with fewer people less cost they have no marketing costs virtually no r d no almost no capital expenditures um and so those those should go up steadily over time and you could probably even go into a period of slight volume declines and you know pricing power would still push margins um higher what do you think about management and kind of their capital

allocation strategy thus far and then kind of a it doesn't seem like there's anything that's pointing them in this direction but what would you think if they started acquiring other businesses and trying to diversify i know they've been going the other direction but trying to become more than just the dot com dot net dot net registry i would be horrified um yeah yeah so really good question um like um so the management's interesting so the company at the moment is led by the co-founder um of Verisign back in 1995 a gentleman called James Bidzos um now he's had an interesting history with the company like he sort of co-founded it he stepped back he was kind of um you know like uh not a top executive but kind of leading business

development which is quite often you know these entrepreneurs who start things they want to be you know out in the field they don't want to be dealing with hr issues um and so he's kind of you know been with the company stepped back from the company um and then you know in 2008 he came back he became chairman um he became interim ceo he installed a couple of protégés um one of his left and then he took on the full ceo role and he's kind of been doing that for 15 or so years now um uh the company just had so many problems with their dot-com acquisitions almost every business they've ever gone into purchased some of the ones they've run have been really mediocre even now they still run the ssl certificate business um which is kind of like a you know

stamp of security on the internet not every website needs to have one even that was a mediocre business because you know competition eventually got introduced to all these things so out of all these things they've done and you can go back and you know tens of billions of dollars of acquisitions and you know they did identity that it's cyber security you name it all kinds of things trying to get a lock on a piece of the internet that would actually stick and have durability and um you know basically none of it panned out it's just this one acquisition they ended up doing at the very top of the dot-com bubble um that actually turned out to be a value accretive and so a lot of the management churn that happened in the late 2000s before bidzos came back

full-time was essentially um you know executives having trouble with um laying off parts of the business executing the plan that they had after the dot-com bubble which was essentially to divest themselves so you know they've had a terrible history of m&a except for one so they did one really really good piece of m&a and many many billions of dollars of value destruction if they started to do m&a again which i don't think they would do because they have what i call the like the gold standard of management remuneration which is basically all the short-term and long-term um incentive agreements that uh senior management has is tied to operating margin expansion so like unless and as you guys will know the operating margins are

extremely high so unless they were actually able to find something that had like 50 percent even even margins that will expand um they're going to get less money so they they will they will they would be negatively incentivized to do something like that of course bids us you know he's executive chairman and ceo and a significant shareholder so if he like had a you know a crisis of faith in the latter part of his executive career and then just decided to get the board to change remuneration structure i think that would be like a huge red flag a massive mistake for the company but um you know in the in the bidsos era where management was incentivized and you go back and read the the proxies but basically they're incentivized to throw off

everything that doesn't make cash and they were incentivized to um you know have the uh have on on the direction of operating margins and so that basically just got them to bear a sign got them to the pricing power model that they have now and focusing very clearly on that essentially all the incremental free cash flow and there's a lot of it they plow 100 of that into buybacks which is a very rational policy and they've been very adept at that so they're very good at playing the levering up when it makes sense to repurchase shares so you go back and have a look at a history of how many shares they're repurchasing literally every time the shares dip they borrow more money to repurchase the shares um and that's been a really really successful um really successful

model for them you would think that a company that had like you know two percent volume growth five and a half percent pricing growth you know that would be like a you know a 10 percent grower or something like that it you know eps has grown far in excess of that because they've been able to juice the returns with well-planned buybacks. Yeah. I mean, if you look at the shares outstanding chart, it's quite consistent. You always like to see that. I mean, it's just much, much better than those acquisitions. And as you mentioned, it seems like they have very strong incentives that are aligned with the management team. I do want to talk more specifically about the valuation though. You wrote about this in your write-up. You kind of did some estimates around

What is the share price expectations right now? Kind of go through some of those numbers. What multiple do you think? And you can choose whatever multiple you want, I guess. What multiple do you think this would be a compelling investment? And what's your reason? Yeah. So look, the quick algorithm for the total stock return for these kind of companies is

just like you know volume growth plus or minus um pricing um you know plus or minus buybacks plus or minus the leverage that they use um uh to repurchase more shares and so like the last 15 years that's been like a low teens um you know eps grower you know mid-teens to sometimes 20 depending on the year um i think going forward it's probably fair to say that um you know you get like a low teens you know this is a low teens eps grower um if you keep those assumptions in place they'll be able to you know borrow money to repurchase the shares which will juice the you the main algorithm um the thing that i get concerned with just on that level is that from time to time the u.s government has put pressure on the company for them to stop price increases

so there was significant pressure in 2020 for them to stop doing that there was the last time this happened the obama administration influenced the company to stop uh the allow to the agreed pricing increases and i think that was during the 2014 2015 time period um and then you'd had periods of time where the company for one reason or another didn't raise prices so before bids came back the company just had not raised prices on the dot com names for a number of years for reasons that are still unexplained um so i think there's like you kind of have to underwrite a little bit of that that you may have a period in time where the company one reason or another does not raise prices, if that's political or, you know, for an external reason.

I think that's less likely now than it is in the past, just because of, you know, how management's incentivized and the culture of where things are. But I don't really see the, you know, the primacy of the .com domain, you know, going out of favor. You know, I don't see the, you know, mobile being a significant headwind to this. I think what's happening in China is very interesting and that has really dampened, you know, some demand for it. So I think you can still kind of stick to the, you know,

the 2% kind of growth. Maybe that's, you know, being optimistic and the price and growth, but you kind of want to leave a margin of safety there, something like that. I think for a business that, you know, takes no incremental capital and can produce more earnings i think you should be willing to pay up for something like that um especially when you get all the money back in buybacks or you get more than 100 of the free cash flow back because they lever up to repurchase shares um so you know in that write-up i think i said something like a high teens uh you know

trailing multiple um in the past you've been able to get this for like 10 times earnings 11 12 times earnings which is like an outrageous bargain um so i think somewhere in the middle there obviously interest rates would affect this um so if we had a period of sustained interest rates above six percent i think you'd want to you want an appreciably lower multiple than than like 16 or 17 i think in the write-up i said like a six or seven percent earnings yield would be great you know somewhere between there and you know 20 times earning a five percent earnings yield that gets you to like a mid-teens ira um i think you know it's just not as attractive these days because the multiple is always so high because everyone knows how good it is it's obvious how good it is

it's not like all the margins and the business profile was obscured by you know other nonsense going on and then they were able to kind of you know break out of that um but i think something like that is is fine and you know you do perfectly well all right let me run a scenario by you let's say a bunch of dot coms are down for like an hour and it's like this like widespread internet outage and verisign is kind of the culprit does that is that cause for concern for you because in that scenario maybe the contract is up for bid next time renewal comes around but am i thinking about the right or would there probably be some leeway yeah i yeah it's a really good point i um so yeah so the service level agreement is 100 uptime and they have basically never failed on

that to their great credit so they do like a really really good job at that um if they fail on that so that's an opening for the government to not renew um and i think that's just a really political question like if that had happened in 2014 when a lot of um the controversies were going on i think like maybe a killer maybe maybe that's like a death shot i think at a moment this is like not a very controversial issue uh the last renewal kind of went through um pretty seamlessly and they have this proprietary system called atlas which like you know no one has ever built anything like this it would be a significant project to just replicate all of this for nothing so i think probably in an instance like that um the government might look to like alter the terms

of the agreement so maybe they might uh you know get them to either spend more money structurally So last time they convinced them to spend, you know, like 20, 30 million bucks on, you know, some nonsense. And or they might come for the pricing. They might say, well, you know, you're only going to get 3% a year or something like that. And obviously, all of those outcomes, the first outcome would not be bad. A few million bucks here and there. Like, that's not a big deal for a company that, you know, will probably make a billion in EBIT a couple of years out. um and uh in the second case if they came for pricing that would be you know that that's going

to change the whole um your whole valuation algorithm so not a killer in a highly politicized environment you know which is not unlike you know happened before it can happen again yeah it could be a complete killer but i think that's probably unlikely given um given the technology they built um and i think they've done a good job of explaining that to the government okay let's say the contract which the next one's coming up for renewal in what like two years am i thinking maybe maybe it's a little longer but let's say it is renewed is there any chance that the new terms give them better price increases um i think that's extraordinarily unlikely um so basically uh the way the agreement works

or my understanding of it is that you can assume renewal given that there isn't a material breach of the contract on either party's side. So really the only person who would want to not continue with the contract would be the government. I believe they're assigned under almost all circumstances would want to continue with the contract. And I can't see many scenarios where the government

or ICANN breaches their agreement and that leads to significant leverage for VeriSign to negotiate higher pricing. Yeah, I can't really think of any scenarios in which, you know, the government would kind of say yes to that even, you know, even if, let's say, the desirability of the dot-com and the dot-net registries went into, like, complete reverse and, you know, volumes are declining 10%, 20% a year,

something like that. um i think the government would still kind of just be like oh well this is your problem you know you deal with it you know type type thing so yeah i think um the the catalyst for pricing would kind of be like if the way i think about it is like if the government allowed them to negotiate directly with company like with big companies right so if you had like you know 10 you know had a billion in revenue or something like that and they would say under that case you can go directly to the company and negotiate um you know i'd be very interested to know what google would pay for their dot-com registry like like there was that story years and years ago where some kid

like got a hold of yahoo's registry like they forgot to renew it and some kid got in there he um he registered it for himself and they had to pay him hundreds of thousands of dollars to get it back i remember the for the kid yeah the second or the aftermarket in the early days of internet boom i believe mcdonald's.com someone i think that was over a million dollars paid so yeah i mean privately this would be could be even a better business honestly why do you think buffett was attracted to this business he still owns a sizable percentage of the number one shareholder yeah number one shareholder yeah what do you think attracted him to it

yeah it's funny it's like he like every time you find something that's really interesting like he's always on the registry like you know the old man always gets there first um you know i i think several times in his career he's been attracted uh to these types of businesses so he was the um there's a company called various analytics which you know is kind of an analogous business in the insurance industry and he that was a collective so it was owned by all the large property casualty insurers and some other insurance companies he was the only person to keep a hold of his stock after it IPO'd and he you know really likes you know he you know he says it infinitum that he likes businesses that can produce more capital without any more incremental capital being spent

and that's exactly what this is the other thing that he likes to do is he you know he likes value with a catalyst in these quality names so i speak about what he's doing this isn't like you know net nets or anything this is kind of his career at berkshire hathaway and you know in situations like um um in like the washington post or coca-cola or you know fannie mae um you know even you know Things like Apple, he likes these really good businesses when they're in transition in between, you know, they're transitioning from a period of mismanagement or the capital allocation has been bad or for one reason or another, you know, margins and cash flow are going to inflect and obviously make the business more valuable, hence being a value investor. And so I think that's exactly what he saw in 2014. there was at that point there was you know six or seven years where the company had had a strategy of um rolling back their subscale and sub quality business lines

they've been moving to a rational capital allocation policy and they had been you know dramatically reducing their cost structures and like those are all you know really good things for the continuing shareholder, especially when you have this super high margin, decent growing business that doesn't require any more capital, just keeps throwing off more through pricing every year. And so I think he saw that. I think 2014 was the year when the company had several problems with the government. So the government was bringing pressure for them to stop raising prices.

The government was also threatening to change the nature of how the .com and the .net registries were going to be managed going forward. And so there's a lot of doubt, uncertainty about, you know, what was going to happen with the company. And at the same time, the whole financial model of the company was changing into what it is today. and you know the i think you know i've gone back and had a look i think on a forward basis you know you're kind of getting this for like low teens forward multiple um in an environment where like interest rates were you know approaching zero and so yeah it was like you know it's been a really successful investment for him um like the ball ball ball case basically played out um and i think it's you know right that's all those things are right in his playbook all right let's wrap things

up with a well this is a fun one but we also want to make sure we cover the risks of the business so in your write-up which again if anyone's interested will be in the show notes you gave yourself kind of a rhetorical self-question it's like so why don't i take out a second mortgage and this is paraphrase, put my entire net worth into calls of this company. To put it another way, what are the risks here? What's keeping you from investing today? Maybe, you know, we talked about valuation being a bit aggressive here, or excuse me, the multiple being a bit aggressive. So maybe besides that, what's keeping you away from this? What's keeping it from being a position like FICO, which was we discussed before is, and you can correct me if I'm wrong, a core position in your

portfolio no no that's completely right um i think um you know uh personally i like to force rank my portfolio on quality not necessarily on price i think price is really important to if you're going to buy something you want to you know a low price which allows you know a margin of safety and high returns and all that good stuff um uh if i were to compare this company to like FICO. FICO has unregulated pricing. So, they can and they do raise prices well in excess of 5.5% every year. So, there's like a news article going around that, and this is apparently true now, where they've raised the prices of some scores on smaller financial institutions like 400 this year and so you know that's like a 395 delta um between them and so the fact that these

guys you know if they had unregulated pricing or they were able you know they were able to do the scenario um that we talked about before where they were able to go to google and like hold a gun to their head and say hey um how about you give me a billion dollars for google.com um i think that would be like a you know that would be wonderful you could own that at like any price right um because you know unregulated and aggressive pricing and so uh these guys they don't they don't have that they have a you know it's a very decent and good business and um you know like 30 times trailing you know 30 times forward i think you're probably looking at something like a market return and so you know price would be my first uh you know pricing of this business at its current

trajectory would be my first uh reason why i wouldn't want to own it especially when i compare it against other things that i own um and then secondly um you know i think you know historically this is uh one of those companies and fico goes through this and like all the other kind of you know quasi government monopolies go through this they go through a period of you know um political interference and controversy and that kind of thing and those can um like that's going to happen i think you can basically underwrite that it's going to happen at some point at some point there will be uh the government will try to leverage um you know their bargaining position against the company or you know general political pressure we brought to bear um and that and that would be

like a headwind and so i you know typically when people have done well in this is when they bought it when you know there's been uncertainty and you know the company had for one reason or another had not been raising prices. And so I don't like to buy things that are like peak multiple on peak earnings. I like where you can probably have a bit of a catalyst for them to return. Or you might not. It might just keep chugging along. I don't know. But I'd rather buy it when there's some uncertainty. Okay. I have one more question before we conclude. It sounds, and I'm not saying this a bad way but it sounds a little boring in terms of it's a very simple model and growth is probably pretty easy to calculate is there anything i guess if you were in the ceo chair is there anything

you'd do differently is there anything you'd want to see them do to maybe spur growth a little bit or would you change anything? You know, probably not. Like there's not really much, yeah, just like you say, like there's not a lot that they really can do. You know, they keep the system running and they enact the price increases at the intervals that they're allowed.

And yeah, they do a good job at that. I think, you know, like we said before, I'd be like horrified if they went and did a lot of M&A. I think one of the advantages, some of these other, you know, businesses of its ilk, like, you know, like a FICO or Averisk or even Moody's, something like that. they because they have like a you know it's kind of like a proprietary data type business they've been able to take that and they've been able to roll it off into software offerings um which are you know um they enjoy a lot of the same features as the core business um if these guys tried to do that i'm not sure they have any proprietary data you know they've only got like you know their domain names um so i'm not sure how they would roll that into like

you know a capital light service offering that might be something that's interesting if they have someone again i hate to say it but i if they started doing a lot of biz dev and stuff like that i'd get really nervous um just because the core business is so good you know if you take you know you take high returns and you put them into something where you don't know what the return probability is going to be you know that's usually a bad equation what do you think the odds are the the dot ios of the world start to make a comeback against the dot coms yeah i think it's um it's not dot ai dot ai oh yeah exactly well you and you don't know what the next one is right so there might be like you know there might be a really charismatic

you know new modality either of you know money or whatever you know that might capture a lot of people's imagination and um yeah i think you know you can't can't necessarily underwrite that i think you know the the the way to think about it is that like every additional you know dot ai or dot io or whatever it is um that's usually a um a catalyst for that person to also register a dot com um so uh these standards you know that people kind of like you know gravitate towards um they still confer like legitimacy so like still being trust you know being trusted on the internet's a big thing and if you're just a dot ai or dot io whatever there is always going to be some portion of the population who's not going to trust you like you know this sounds

scammy or whatever if they can go to a dot com it makes them you know these guys you know they're They're being regulated by the U.S. government. And so, you know, I think, you know, at the margins, you know, probably the diversity of domains is a net benefit for the dot-coms. All right. Well, I think that's all the questions we have. For people that want to keep up with you, read more of your work, what are the best places to do that? Yeah, you can find me on Twitter at Larry Jamison and, yeah, on the Substack as well. So buyback capital on Substack, try to put out a piece every week.

But yeah. Links to that will be in the show notes. So for anyone spelling, you know, it'll be easy. All right. Well, that's going to do it. We want to throw a disclosure on this. We should remind listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation.

We are, however, general partners at Arch Capital. Most of the clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thank you, Larry, for joining us again, and we'll see you all next time.