Verisign (NASDAQ:VRSN), the provider of registry services for all .com and .net domain names, posted revenue of $239 million in Q2 2013, up 12% y-o-y. Its operating margin improved from 50% in Q2 2012 to 55.2%, mainly on account of 12% and 10% declines in sales and marketing, and general and administrative expenses respectively.
We expect Verisign to post moderate revenue growth in the future. Our outlook is based on the expected decline in market share of .com and .net domain names as a percentage of all Internet domain names and a slow rate of increase in combined fee for .com/.net domain name purchases and renewals. While the company announced another fee hike for .net domain name registry, the restriction on .com domain fee hikes contributes towards our moderate revenue growth outlook.
A new revenue stream could open up for Verisign as the Internet Corporation for Assigned Names and Numbers (ICANN) plans on expansion of the gTLD universe. Verisign has applied for 14 new TLDs, and applicants for around 220 new gTLDs had originally chosen Verisign to be their back-end registry services provider. However, owing to uncertainty in this process, we cannot reliably estimate this new revenue stream.
.com and .net domain base continues to grow
Verisign forecasts the number of net additions to its .com and .net base between 1 million and 1.4 million in the third quarter.  Based on this, we expect the market share of .com and .net domain names in total Internet domains to decline in the future. We believe the future growth rate of .com/.net domain name base will be lower than the overall Internet domain name growth rate due to competition from country code domain names and the pending introduction of new gTLDs.
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Increase in registry fee for .net domain name
Verisign reported that it will hike the domain name registry fee for .net domain names from $5.62 to $6.18, w.e.f February 1, 2014, as per its agreement with ICAAN. However, the domain name fee for .com is expected to stay constant at $7.85 until November 2018. Therefore, we believe the combined fee for .com/.net domain name purchases and renewals will increase at a slow rate of 2% over our forecast horizon and reach about $8.30 in the long run.
Guidance for 2013
– Revenue in the range of $952 million to $962 million, representing y-o-y growth of 9% to 10%
– Non-GAAP gross margin to be atleast 80%
– Non-GAAP operating margin in the range of 58% and 59%.
We are in the process of updating our price estimate for Verisign’s stock.Notes:
- Verisign, Inc. (VRSN) Management Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, July 25, 2013 [↩] [↩]