VeriSign Q1FY14 Preview: Double-Digit Revenue Growth To Continue, Tax Benefit Could Lift Bottom Line

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VRSN: Verisign CA logo
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Verisign CA

VeriSign (NASDAQ:VRSN) is scheduled to report its Q1FY14 results Thursday, April 24. The company is the sole registrar for .com and .net domain names, commanding a 47% market share in 2013. VeriSign grew its registration base by 5% to 127 million domains in 2013. However, domain growth for the company continued to lag overall market growth by 3% in 2013. Despite slower growth in domain registrations compared to the overall market, VeriSign continued to grow its top line at double-digit pace, with revenues reaching $965 million in FY13.

Q1FY13 revenues stood at $236.5 million approximately, growing 15% on a year-on-year basis. VeriSign has historically posted the highest revenue growth rate in its first quarter. However, gross margins are the lowest for the period. This indicates that the company invests during the Q1 period to boost revenue growth rate. Gross margins for Q1FY13 stood at 80%. Comparatively, the second, third and fourth quarters in FY13 posted gross margins of 80.5%, 80.5% and 81% respectively.

For Q1FY14, we expect this revenue and margin trend to continue for VeriSign. The company’s top line should continue to see double-digit growth rate, despite a deceleration in domain base growth. We expect gross margins to remain close to 80% in Q1FY14, followed by an expansion in subsequent quarters.

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Average Price Per Domain In Focus

VeriSign’s domain base has seen a steady deceleration in growth due to migration of customers to other generic top-level domains (gTLDs) as well as country-code top-level domains (ccTLDs). Other gTLDs and ccTLDs offer greater flexibility for businesses in choosing a url of their choice, which is constrained by the huge size of the .com root zone. This reduced flexibility in choosing a url of their choice has resulted in businesses migrating to other gTLDs and ccTLDs in recent times. As a result, VeriSign’s market share in the global domain registration market has declined from 52% in 2008 to 47% in 2013.

Despite the shrinking market share, VeriSign has been able to grow its revenues at double-digit pace. The reason for the strong growth in revenues is a shift in domain base growth for the company. Although the .com domain base is close to 7.5 times the domain base of the .net gTLD, growth rates for the .net domain have seen an increase in recent times. For now, VeriSign charges $7.85 for a .com domain and $6.18 for a .net domain registration. However, contractual obligations restrict VeriSign’s ability to hike its .com registration prices through November 2018 while it has the right to hike its .net domain price by 10% each year through June 2017.

In the near term, the obligation on its .com registration pricing should restrict a strong increase in top line. However, faster growth in the higher priced .net domain should boost top line for VeriSign in the long term.

Net Tax Benefit Could Lift Bottom Line

During its Q4FY13 earnings call, VeriSign reported liquidating one of its domestic subsidiaries for tax benefit purposes by claiming a worthless stock deduction from its 2013 federal income tax return. The liquidation of its subsidiary resulted in a net tax benefit of $375 million, subject to IRS audit and adjustment, and has not been included yet in its prepared FY13 financial results. [1] Last fiscal, the company reported a net tax benefit of $88 million and a net income level of approximately $545 million. A favorable tax claim from the liquidation could lift VeriSign’s bottom line significantly in FY14.

On the flipside, the company’s tax burden for FY14 would be weighed down by its plans to repatriate approximately $700-$800 million of cash held by foreign subsidiaries. [1] Repatriation of liquid assets is allowed to be repatriated along with capital appreciation after the payment of taxes due on them. This tax levied by foreign governments could offset the potential tax benefit resulting from the worthless stock deduction for VeriSign.

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Notes:
  1. VeriSign Management Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, February 2014 [] []