VeriSign’s Solid Growth, Predictable Business Model Support Its Outlook

Verisign (NASDAQ:VRSN) reported its earnings for the fiscal year 2012 on January 24, and it was mostly business as usual for the leading domain name registrar. ^[1] It reported revenue of $874 million, up 13% year-over-year, which was driven primarily by an increase in registered domains. It ended the quarter with roughly 121 million domain names or 33 million new gross registrations in 2012. The restructuring and cost cutting initiatives started around 2008 continue to yield results with gross margins improving to ~81% in 2012.

The company expects a new revenue stream to open up around 2014 from the new generic Top Level Domain (gTLD) program. In December, Internet Corporation for Assigned Names and Numbers (ICANN) completed its Prioritization Draw for processing applications related to its new gTLD program. VeriSign is an applicant in the process and may get rights for new gTLDs after the process is over. It also expects to provide back-end services for other registries as well as leverage its patent portfolio to generate revenues.

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.com and .net User Base Continues To Grow

The company ended the quarter with 106.2 million registered .com names and 14.9 million registered .net names. Combined, these represent a 6.4% y-o-y or a 1% sequential increase. The domain name renewal rate improved from about 72.5% in Q3 to 72.9% in Q4. The company believes that the renewal rates are lower on account of the prevailing economic conditions in Europe and changes made in search algorithms by dominant search engines which negatively effected the monetization of some domains which were subsequently not renewed.

We expect the total number of registered .com/.net domains to reach approximately 128 million by the end of 2013 as the .com/.net domain system’s growth slows down slightly on account of  pending introduction new gTLDs towards the end of 2013.

.com and .net Set To Lose Market Share

ICANN is expected to start introducing new domain names in groups of 500 in 2013. The share of .com and .net domains is expected to go down as a result. Nevertheless, Verisign will provide back-end registry services for customers using the new top-level domains. Applicants for 220 new proposed top level domains have already signed up with Verisign. Also, the company itself has applied for 14 new top level domains. The company expects these developments to result in a new revenue streams around 2014. ^[2] On the other hand, it has the potential to cannibalize .com and .net registrations since customers may opt for more specific and business-relevant domain names like “.autoinsurance”, “.google” and “.poker”.

Improvement In Margins Is Temporary

VeriSign improved its gross profit margins from 78.6% in 2011 to 80.8% in 2012. The improvement is a result of the restructuring process which started back in 2008. However, the margins are set to decline over the forecast period as the primary source of revenue growth for the company, the .com domain registration fee, is fixed as per the new amended contract with ICANN. Previously, VeriSign was permitted to hike the .com domain registration fee four times in the six year contract period. The fixed fee means that VeriSign’s margins will shrink as the costs for maintaining the infrastructure behind the service gradually escalates.

Verisign competes with other domain name registry providers like NeuStar, Employ Media, and Afilias to win new and maintain existing registry rights. Its .com and .net domain registration business accounts for nearly 90% of its value.

We have a revised $40 Trefis price estimate for VeriSign which is at par with the market price.

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1. VeriSign Reports 13 Percent Year-Over-Year Revenue Growth In 2012, VeriSign Inc., January 2013 [↩]
2. VeriSign Management Discusses Q4 2012 Results – Earnings Call Transcript, Seeking Alpha, January 2013 [↩]