VeriSign Posted A Moderate Fourth Quarter, But Aims Higher With Increased Marketing Activities

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VRSN: Verisign CA logo
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Verisign CA

VeriSign (NASDAQ:VRSN), the dominant player in the Domain Name market, posted its fourth quarter results on Thursday, February 5th. VeriSign’s revenue for the quarter was $256 million, a 4.2% increase on a year-over-year basis. GAAP operating income was $142 million, a 9% increase on a year-over-year basis. The increase in revenue was primarily driven by effective marketing activities which are reinforcing VeriSign’s brand value, the market dominance of the .com brand, and the slow but steady demand for the .net brand. [1]

The operating margin for the company stood at 55.6% reflecting an expansion by 260 basis points. The Q4 operating margins were lower than expected by the industry ,and the reasons for that were: a sequential rise in operating expense (with respect to Q3 2014) to the tune of $3.4 million, $1 million of seasonal expenses, and R&D related expenses. VeriSign’s net income declined by 77% to $65 million on account of tax related issues on some of its international operations.

In the fourth quarter, after processing 8.2 million new domain names, VeriSign Registry Services added 0.59 million net new names in its domain, to end with 130.6 million (115.6 million .com and 15 million .net) domain names, reflecting a 2.7% increase over the base of Q4 2013. The net name additions during Q4 2014 fell below expectations, because of the weakness in demand  in the growing economies, mainly China. Based on these trends, VeriSign predicts that the net additions for Q1 2015 will be between 1 million and 1.5 million.

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VeriSign registered $1.010 billion in revenues for FY 2014, and full year non-GAAP operating margins of 60.2%. 2014 marked 17 years of uninterrupted availability of the .com and .net domain name systems, both of which marked their 30th anniversaries.

We have a Trefis price estimate of $60 for VeriSign. We are in the process of updating the price estimate.

See our complete coverage of VeriSign

Renewal Rates Plunged In Q3 2014

The renewal rates for Q3 2014, .com and .net was 72% compared to a 72.7% for Q3 2013. Renewal rates cannot be fully measured until 45 days after the end of the quarter. The management believes that the fourth quarter 2014 renewal rate would be around 72.4%, as against a 72.2% renewal rate for Q4 2013.

The renewal rates have been weaker on account of search engine algorithm changes, growth in geographies with lower first time renewal rates, lack of promotion due to previous year registrars. This brought down the overall renewal rate. [2]

The company, having reached a matured stage in the industry, is riddled by problems such as saturation in the .com domain and intense competition from other gTLDs (Generic Top-Level Domains). In our Q4 2014 earnings preview article, we discussed the marketing strategies which VeriSign is undertaking to sustain its leadership position and grow further.

.net Displays Sluggishness But Management Still Has Faith

The .net zone growth had been flat in  2014. At the end of Q4 2014, the total base of active registered domain names in .net was 15 million. This number has been almost constant since 2013. [3] The primary reasons for the flat growth of the .net zone were attributed to: the introduction of a rival gTLD program that is providing stiff competition to .net growth, and confusion regarding similar sounding domain names among the newly introduced gTLDs, which adversely impacted their demand, as well as .net’s demand. Also a factor, surely, is that .net is a relatively lesser known brand, as compared to .com. [2]

Though .net experienced flat demand in 2014 however, management is optimistic that the brand is growing at the same pace along with the newly introduced gTLDs. In 2014, .net experienced 3.6 million gross registrations and it is approximately equal to the total registrations of all the new gTLDs combined. The user’s confusion because of the 400 odd newly introduced  gTLD and their brand value did make a dent in .net’s demand but the brand has a 30 year old heritage and according to the management, the .net brand is going to strengthen further with time.

On the flip side, the demand for .net 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.

Strengthening Registrar Marketing Activities

VeriSign has increased its year-on-year marketing spending by 3% to $92 million in 2014 (as against an almost 9% decline in 2013). 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.

In the last couple of quarters VeriSign’s performance made a turnaround after undergoing a sluggish period. VeriSign attributes a lot of this success to the marketing activities undertaken by its registrars. Currently, the registrar marketing tactics is mainly concentrated on increasing ARPU.

VeriSign is also undertaking promotional activities with its registrars, for example, launching a contest for .com names. Also, the recent Superbowl ads-where most of the advertised companies were branded on .com gave an indirect endorsement and brought greater exposure to VeriSign’s brand name. There was  a new record sale in the aftermarket of a .com domain when 360.com sold for just under $17 million. [2]

VeriSign is also investing in markets with potential for its growth. Hence it is making a lot of international investments along those lines.

New GTLDs still under speculation

According to VeriSign, there are some uncertainties regarding the long term growth of new rival gTLDs. There are around 400 TLDs in existence. The gross registrations for 2014 was around 3.7 million in those TLDs. 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. Also the number of transactions taking place on those Domain Name System (DNS) is of importance. For example, VeriSign’s DNS witnesses around 82 billion transactions in a day. Additionally, 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.

On the flip side, a recent survey was conducted by Research Now (on behalf of the Domain Name Association) to understand receptiveness towards new domain name extensions. The research included 7 countries, namely, Australia, China, India, Russia, Turkey, UK and the U.S. It showed a receptiveness towards new domain name additions, especially in developing countries with high internet penetration, like India and China. The choices offered were .com, .ccTLD, and new gTLD options. The results revealed preference towards the first two. However, the survey also indicated a willingness to trust new gTLDs with industry associated words, such as, ‘worldco.international’. [4]. Hence, the confusion regarding new gTLDs might be alleviated in the future and the new gTLDs might capture a significant portion of the market putting VeriSign’s market dominance at risk.

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Notes:
  1. VeriSign Form 8-k For The Period Ending 01/30/15 []
  2. VeriSign’s Q4 2014 Earnings Call Transcript, Seeking Alpha, February 2014 [] [] []
  3. VeriSign’s Q3 2014 Earnings Call Transcript, Seeking Alpha, October 2014 [] []
  4. Research suggests consumers are ready to embrace new gLTDs, World Trademark Review, October 2014 []