A Look At VeriSign’s Domain Registration Business
VeriSign (NASDAQ:VRSN) is a provider of registry services for .com and .net domain names, with a market share of approximately 48% in the Domain Name System (DNS) market, according to our estimates. The company has a market capitalization of $7.92 billion, and competes with other domain registration service providers such as Neustar.
For the nine months so far, VeriSign reported revenues of approximately $719 million vs. $643 million during a similar period in 2012, indicating double-digit growth in its top line. In addition to strong top line growth, VeriSign recorded operating profit margins of 55% for the January – September period, compared to 50% during the same period in 2012. Profit after tax margins expanded to 35% compared to 33% in 2012.
In this article, we take a closer look at VeriSign’s business divisions. We have a $56 Trefis price estimate for VeriSign, which is approximately 4% lower than the current market price of $57.
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Business Summary
VeriSign primarily generates revenues by providing registration services pertaining to .com, .net, .cc, .tv, .gov, .jobs and .name domains, on an annualized subscription and renewal basis. However, revenues from domains other than .com and .net are insignificant compared to consolidated revenues for the business. Currently, the company has close to 126 million active .com and .net domain names out of 265 million domain registrations globally. The average registration fees for .com and .net domains are $7.85 and $5.62 respectively. Even with VeriSign’s strong market position in the DNS market, it operates with the oversight of both the Internet Corporation for Assigned Names and Numbers’ (ICANN, for all registry agreements) and the U.S. Department of Commerce (DoC, for the .com agreement). Agreements are in place with both organizations that govern various issues including pricing.
Moderate Top Line Growth Prospects Despite Recent ICANN Agreement
According to an agreement with the ICANN and the U.S. DoC, VeriSign is expected to charge its customers $7.85 for .com registrations until November 2018. Given that .com domains account for almost 88% of the .com/.net domain name mix [1], VeriSign’s ability to post strong top line growth numbers looks limited. However, the company has the contractual right to hike its .net registration fees by 10% each year through June 2017.
Additionally, growing demand for country code top-level domains (ccTLD) from businesses worldwide could restrict new registrations and renewals of .com and .net domains. These are domain designations reserved for individual countries (i.e., .uk, .de, etc.) and they are growing more rapidly. VeriSign reports that .com/.net domain registrations have grown by 5% in Q3FY13 compared to Q3FY12. During the same period, ccTLD registrations grew 14% to reach 119.5 million. This rapid expansion in ccTLD domain names could induce certain VeriSign’s customers to migrate from their current .com/.net mix.
On the flipside, the company aims to monetize its patents to support revenue growth in the future. VeriSign CEO, Jim Bidzos, recently stated that the company has a total of 231 patents and patent applications within the U.S., in addition to 304 granted and pending patent applications across other countries. [1] While details on how the company plans to monetize have not been stated, we expect royalty revenues will contribute an increasing percent of VeriSign’s overall revenues over time. Additionally, VeriSign’s application for 14 new domain names, along with 200 new managed domain name relationships, could provide new sources of revenue for the company as well. [2]
We expect VeriSign to post revenues of approximately $960 million, representing a top line growth of 10% for fiscal 2013. However, its market share in the .com/.net DNS market is expected to continue declining going forward.
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Notes:- Verisign Grows .com and .net as New gTLDs Set to Debut, enterprisenetworkingplanet.com, October 2013 [↩] [↩]
- VeriSign Profiting From .Com Slows Addition of New Names, Bloomberg, August 2013 [↩]