Top Trends That Impacted VeriSign’s Performance in 2014

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VRSN: Verisign CA logo
VRSN
Verisign CA

VeriSign (NASDAQ:VRSN) is the authoritative registry service provider for all .com and .net gTLDs (Generic Top-Level Domains), as well as the sole registry service provider for gTLDs like .cc, .tv, .gov, .jobs, .edu and .name. It is the leader in the Domain Name market with a 47% market share.

Though the company registered a ~5% increase in sales to $754 million in the first nine months of 2014, the growth rate has declined considerably. VeriSign’s sales grew by ~12% in the first nine months of 2013. This slowdown in the growth rate was primarily due to saturation in the .com domain, lack of significant traction in the .net domain, and intense competition from other gTLDs, especially ccTLDs (country code top-level domain names). However, VeriSign regained its growth momentum to some extent in Q3 2014 after a disappointing performance in the first half of the year.

The company saw the highest third quarter gross additions of 8.7 million to date, in Q3 2014. Some of the primary factors propelling the growth in the third quarter  were:

  • One of VeriSign’s prominent U.S. registrars concentrating on customer acquisition and acquiring domain names through discounts.
  • China’s continued healthy performance which acted as a driver for international growth.
  • VeriSign’s focus on marketing expense to give more exposure to its brands. VeriSign increased its year-on-year marketing spending by 6% to $68 million in the first nine months of 2014 (as against a 17% year-on-year decline in marketing spendin in the first nine months of 2013). [1]
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In this article, we explore the main trends that impacted VeriSign’s business in 2014,as thus far reported.

Our Trefis price estimate of $60 for VeriSign is almost in line with the market price .

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Competition And Confusion Are Simultaneously Stirring The Existing gTLD Space

The .net zone growth had been flat till the end of third quarter 2014. At the end of June 2014, the total base of active registered domain names in .net was 15.2 million . This number has been almost constant since June 2013. [1]. Reasons for the flat growth of the .net zone were:

  • The introduction of a rival gTLD program (which gained around 2.8 million registrations till date), providing stiff competition to .net growth
  • Confusion regarding similar sounding domain names among the newly introduced gTLDs, which adversely impacted their demand. Also a factor, surely, is that .net is a relatively lesser known brand, as compared to .com.

Future Prospects For .net?

In Q3 2014, VeriSign’s .net brand witnessed yet another flat quarter and the demand might further slow down with the hike in prices from $6.18 to $6.79 scheduled for February 2015. The company is trying to make up for the lack of volume growth in the .net domain, with an increase in price to generate more revenue. However, the plan might not be sustainable in the long run. Not only can it decelerate the .net demand even further, but, with the increased influx of competition, the existing users might decide to switch loyalties.

Saturation Of The .com Brand

The domain .com is  a well established brand and this has created a niche in the market which is comparatively more resilient to competition  than the .net brand. However, the .com domain name has become increasingly saturated in recent years, causing limits to new additions. In Q2’14, VeriSign processed approximately 8.5 million registrations but could make only 0.42 million net addition into the .com domain root zone. This falls reasonably short of the 1.22 million net additions added in Q2’13.

At the end of Q2 2014, the total base of active registered domain names in .com and .net was 129 million (3.7% year-on-year growth), consisting of 113.7 million for .com and 15.2 million names for .net. New .com and .net registrations totaled 8.5 million during the Q2 2014, as against 8.7 million in Q2 2013. [2]

.ccTLD: A Formidable Competitor Eroding VeriSign’s Market Stronghold

Another factor thwarting VeriSign’s growth is the rising popularity of .ccTLD domain registrations in non-US markets. The .ccTLD is being increasingly accepted by companies due to the favorable government policies regarding their adoptions. Because they are country specific, ccTLDs can only be used by individual countries and territories. An increasing number of businesses, especially SMEs, are migrating to this domain because of government policies intended to encourage their adoption.  These include  a registration requirement relaxation, free domain names subject to specific usages, and so on. In its Q1’14 Domain Name Industry Brief , VeriSign reported that .ccTLD registrations have grown at more than thrice the growth rate of the .com and .net domain names.

VeriSign Focuses On Marketing Activities

VeriSign has increased its year-on-year marketing spending by 6% to $68 million for the first nine months of 2014. The company expects the marketing expenditure to rise over the coming quarters. The company channels the majority of its marketing campaigns through affiliate registrars such as GoDaddy and BigRock, or other resellers to promote its .com and .net domain registrations and drive awareness for the brand across geographies. It has also applied for International Domain Names (IDN) for overseas market. Hence, once they’re available, it plans to spend on partnering with overseas registrars for the marketing of its offerings.

Recently Google announced a plan to act as a registrar and sell a package of services, including domain names, with the aim of developing online presence for smaller businesses in the US. The .com and .net domains would be amongst its offerings. Hence, the management believes that Google acting as a “retail outlet” for their products will greatly aid in expanding its reach.

What Is The Future For Rival gTLDs?

According to VeriSign, there are some uncertainties regarding the long term growth of new rival gTLDs. The gross registrations for the first half 2014 is over 1.6 million. They haven’t gone through a renewal cycle yet to arrive at a net figure. The growth has been rapid with a lot of sales of premium domain names. A majority of registrations is suspected to have been done by speculators. Speculators buy popular domain names to sell them for a profit later on. [3] Hence the long term prospects for the rival gTLDs is definitely a question which only time can answer. On the other hand, with its increased marketing initiatives and already established brands, VeriSign might soon gain a greater share of the domain name market and sustain its leadership position for years to come.

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Notes:
  1. VeriSign’s Q3 2014 Earnings Call Transcript, Seeking Alpha, October 2014 [] []
  2. Internet Grows to 280 Million Domain Names in the Second Quarter of 2014, VeriSign, December 2014 []
  3. VeriSign’s Q3 2014 Earnings Call Transcript, Seeking Alpha, October 2014 []