Declining Renewal Rates Should Suppress VeriSign’s Fiscal 2014 Performance

In its Q1FY14 results, the world’s largest provider of domain registry services VeriSign (NASDAQ:VRSN), posted a sharp deceleration in revenues on a year-on-year basis. Quarterly revenues grew 5% on a year-on-year basis to approximately $249 million, lower than the 13% and 12% reported in Q1FY13 and Q1FY12, respectively. Declining registration renewals for .com and .net domain names from its customers was the prime factor for VeriSign’s slowing revenue growth. In addition to .com and .net domain names, VeriSign provides registry derives for other domains such as .jobs etc. Renewal rates for the fourth quarter of fiscal 2013 was 0.7% lower from a prior year period at 72.2%, and are expected to decline further for Q1FY14.

The fall in VeriSign’s renewal rates is due to a shift in demand from traditional .com and .net domain names to other generic top-level domain names (gTLDs) offered by other domain registrars. Since the .com boom in the late 90s, VeriSign has capitalized on the strong brand pull of its flagship .com domain. However, the recent delegation of new gTLD domains into the Internet root zone, along with rapid increase in country code top-level domain (ccTLDs) names, has tempered VeriSign’s success in recent quarters. Domain names such as .cc have witnessed good traction over the past few quarters.

In this note, we take a look at VeriSign’s strategy to boost customer renewal rate for their domain registrations. We have a Trefis price estimate of $54 for VeriSign, approximately 8% higher than its current market price of $50.

See our complete coverage of VeriSign

VeriSign Banks On Customer Base Expansion For Sales Growth Revival

VeriSign has increased its sales and marketing spend in the recently concluded Q1FY14 to boost revenue growth rate. Sales and marketing spend as a percentage of revenues was 8.2% in Q1FY14 compared to 7.7% in Q1FY13. VeriSign’s sales and marketing spend is the least in the first quarter of a fiscal year, due to relatively higher contract renewals during the period in comparison to other quarters. Subsequently, the company increases its marketing spend to about 10% of quarterly revenues for the remaining three quarters. The company does not have marketing campaigns of its own and relies on its affiliate registrars such as GoDaddy and BigRock, or other resellers for promoting its .com and .net domain registrations.

The higher sales and marketing spend from VeriSign indicates increasing competition for VeriSign in the domain registration market. Although the higher sales and marketing expenditure could attract new domain registrants, we expect renewal rates to continue declining. Customers have been migrating away from VeriSign’s .com and .net domain names due to the extent of saturation in the root zone. The .com domain name alone accounts for more than 45% of all domain name registrations, and new customers are facing problems finding a URL name of their choice in the .com root zone. Additionally, greater contract flexibility for new gTLDs has contributed to the decline in renewal rates from existing customers.

In the near term, we expect revenue growth for the company to remain under pressure from the demand for other gTLDs and ccTLDs from customers. However, greater demand for second level gTLDs with .com and .net as the primary level could boost VeriSign’s revenues on a longer term. Additionally, the opening of second level gTLDs with .com and .net as the primary gTLDs should be able to address the issue of the saturating addressable market, gradually leading to an increase in renewal rates.

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