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

Verisign (NASDAQ:VRSN) reported its earnings for the first quarter of 2013 on April 26, and it was mostly business as usual for the leading domain name registrar. ^[1] It reported revenue of $236 million, up 15% year-over-year, which was driven primarily by an increase in registered domains. It ended the quarter with roughly 123.1 million domain names. This represents an increase of 5.5% year-over-year and a 1.6% quarter-over-quarter.

The growth can be attributed to an improvement in the renewal rate of the domain name registrations with the company estimating it to be at 73.3% during the first quarter. In comparison, the renewal rate in the fourth quarter of 2012 was 72.9%. The restructuring and cost cutting initiatives started around 2008 continue to yield results with gross margins improving to ~81% in 2013. We expect the gross margins decline in the near term as the company struggles to balance the effect of increasing cost of IT equipment and a fixed .com domain registration fees.

VeriSign is primarily a domain name registrar, which has the exclusive registry rights for .com and .net domains from ICANN. It competes with other domain name registry providers like NeuStar, Employ Media and Afilias, to win new and maintain existing registry rights.

Check out our complete coverage of Verisign

.com and .net User Base Continues To Grow

The company ended the quarter with 108.1 million registered .com names and 15 million registered .net names. Combined, these represent a 5.5% y-o-y or a 1.6% sequential increase. The domain name renewal rate improved from about 72.9% in Q4 to 73.3% in Q4. The renewal rate was however below the level of the same period from a year ago. 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 130 million by the end of 2013 as the .com/.net domain system’s growth slows down slightly on account of  pending introduction new gTLDs.

Improvement In Margins Is Temporary

VeriSign improved its gross profit margins from 78.6% in 2011 to 80.8% in 2012. The gross margin in Q1 2013 was ~80%. We believe that the improvement is temporary and that the margins will return to historical levels of ~71% in the long term. The cause behind the expected decline is the fixed .com domain registration fee. 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.

Sharp Cuts In Selling, General & Administrative Expenses

The SG&A figures declined from $51 million in first quarter of 2012 to $37.7 million this year. The sharp decline was a result of the company cutting down its expenses to make up for the fixed .com domain fee and delaying approximately $5 million of marketing program expenses to later quarters. This resulted in GAAP operating margins growing to 56.4% compared to 48.1% in the same quarter of 2012. We expect the operating margins to return to near historical levels in the long term.

We have a revised $49 Trefis price estimate for VeriSign which is at par with the market price.

Submit a Post at Trefis Powered by Data and Interactive Charts | Understand What Drives a Stock at Trefis

1. VeriSign Reports 15 Percent Year-Over-Year Revenue Growth In First Quarter 2013, VeriSign Inc., April 2013 [↩]