VeriSign Q1FY14 Revenues Decelerate Sharply On Falling Renewal Rates

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VRSN: Verisign CA logo
VRSN
Verisign CA

VeriSign (NASDAQ:VRSN) posted Q1FY14 results that were weaker than other historical first quarterly earnings. Revenues stood at approximately $249 million, up 5% on a year-on-year basis. The first quarter for VeriSign has been a relatively stronger quarter in terms of year-over-year top line growth, and the 5% growth registered in Q1FY14, charts the revenue trajectory for fiscal 2014. The company expects a full-year growth between 4%-5% for 2014, with revenues reaching $1,000 million-$1,015 million. Comparatively, this top line growth rate falls well short of the 10.5% registered in FY13.

VeriSign displayed weakness in operating margins as well, which contracted 30 basis points in Q1FY14. The margins contraction was a result of a 50 basis point increase in sales and marketing expenses during Q1FY14. The company expects this investment into sales and marketing spend to boost customer acquisition. The company expects customer renewal rate at approximately 72.6% this quarter, compared to 73.3% in Q1FY13. [1] The added marketing and promotional spend should bolster renewal rate in subsequent quarters.

In this earnings note, we take a look at key takeaways from the recent quarter for VeriSign. We have revised our Trefis price estimate to $54 to account for an increase in sales and marketing spend for VeriSign.

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Domain Name Growth Slows, Renewal Rates Decline

VeriSign’s total .com and .net domain name registrations reached 128.5 million, up from 127.2 million at the end of December 2013. The company processed a total of 8.6 million new domain name registrations this quarter for .com and .net compared to 8.8 million in Q1FY13. [1] The slowing growth in new domain registrations is primarily due to the increase in adoption of other generic top-level domain names (gTLDs) from businesses globally, and this has been impacting VeriSign for the past few quarters. However, a decline in renewal rates from existing customers could materially impact the company’s top line going forward.

Although the company has increased its S&M spend to boost customer acquisition, a migration of existing customers to other gTLDs should strain renewal rates in the short term. In the longer term, the increase in new domain registrations could partially offset the decline resulting from existing customers. However, the pressure from ccTLD should continue to hurt overall domain name growth for VeriSign, as witnessed from our market share forecast for the company.

Share Repurchase Boosts Bottom Line

VeriSign completed a share repurchase of approximately 2.4 million shares for $132 million during Q1FY14. [1] Following the repurchase, earnings per share expanded from 55 cents in Q1FY13 to 71 cents for Q1FY14. The company additionally has approximately $868 million authorized for stock buybacks, and this should continue to drive earnings accretion for the company.

Additionally, the company expects the repatriation of cash to be completed earlier than the previous guidance of Q2FY14. VeriSign has cash to the tune of $700 million – $800 million held by foreign subsidiaries. Liquid assets such as cash and marketable securities are levied a repatriation tax from respective foreign governments. While this should increase taxes payable for VeriSign in Q2FY14, the pending tax claim of approximately $375 million with Internal Revenue Service (IRS) in relation to a worthless stock deduction should lift VeriSign’s net income for full fiscal 2014.

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Notes:
  1. VeriSign Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 [] [] []