Verisign Pre-Earnings: Expecting Modest Growth

Verisign (NASDAQ:VRSN), the provider of registry services for all .com and .net domain names, will report its Q2 2013 results on July 25, 2013. We expect continued growth for the company to be driven by increase in .com/.net domain names. However, we forecast the future growth rate of .com/.net domain name base to be lower than the overall Internet domain name growth rate due to competition from country code domain names and other factors.

While the introduction of new generic top-level domains (gTLD’s) could result in new revenue stream for Verisign in the future, we do not expect any significant revenue from this before 2014. We will look for updates related to Internet Corporation for Assigned Names and Numbers’ (ICANN) approval process in the earnings call.

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Recap Of Q1 2013 Results

Verisign posted revenue of $236 million in Q1 2013, which represented a y-o-y increase of 15%. Its operating income rose by 35% annually to $133 million. The company’s operating margin saw a steep increase from 48.1% in Q1 2012 to 56.4% in Q1 2013. This was mainly caused by 35% annual decline in sales and marketing expenses, as the company delayed about $5 million of marketing expenses from the first quarter to later quarters.

As these marketing expenses will be spread over later quarters, we expect operating margins in other quarters to be lower than the 56.4% level seen in Q1 2013.

Market share of .com and .net domain names in overall Internet domain names is expected to decline

Verisign saw an increase of 1.99 million net names in its domain name base during the first quarter, bringing the total number of registered domains in .com and .net to 123.1 million at the end of Q1 2013. This represented an increase of 5.5% y-o-y and 1.6% q-o-q.

Verisign had forecast the number of additions to its .com and .net base in the second quarter, between 0.9 million to 1.3 million. ^[1] Based on updates to the zone posted daily by the company, we estimate this count at somewhere in the middle of this range. ^[2]

We expect the market share of .com and .net domain names in overall Internet domains to fall from 48.1% in 2012 to 46.6% in 2013. This is based on our forecast that the total number of registered .com/.net domains will increase to around 130 million by the end of 2013. At the same time, the total number of Internet domain names will increase to 280 million. We estimate slower growth in .com and .net domain names, as compared to the overall industry on account of competition from country code domain names and pending introduction of new gTLDs.

Change in renewal rate will be closely tracked

Verisign’s renewal rate was recorded at around 73.3% in Q1 2013, which increased as compared to a figure of 72.9% in Q4 2012 and 73.1% in 2012. However, the renewal rate was lower as compared to 73.9% level seen in Q1 2012. The company attributed this y-o-y decrease to challenging macroeconomic conditions in Europe and changes in search algorithms made by Google, which impacted the monetization of some domains which were subsequently not renewed. We will be keeping a close watch on this figure in Q2 2013, and we believe this metric could see some stabilization in the future.

New gTLDs will not result in substantial revenue stream before 2014

ICANN aims at expansion of gTLD universe, with around 300-1,000 new gTLDs to be added annually. Verisign has applied for 14 of these new TLDs, and applicants for around 220 new gTLDs had originally chosen Verisign to be their back-end registry services provider. While these applications could result in additional revenue stream in the future, there is uncertainty related to the success of these applications and the timing of the ICANN’s approval process. Hence, the company does not forecast significant revenues from these new gTLDs (if any) before 2014. However, we will be looking for updates related to this area in the earnings call.

Our $44.4 price estimate for Verisign’s stock, is broadly in line with the current market price.

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1. VeriSign Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, April 25, 2013 [↩]
2. Zone File Information, Verisign [↩]