VeriSign’s Ongoing Marketing Efforts Might Boost First Quarter Growth

VeriSign (NASDAQ:VRSN), the dominant player in the Domain Name market, is set to post its first quarter earnings on April 23rd.VeriSign registered $1.01 billion in revenues for 2014, reflecting a 5% year-on-year growth. The increase in revenue was primarily driven by effective marketing activities which reinforced VeriSign’s brand value, the market dominance of the .com brand, and the slow but steady demand for the .net brand. ^[1]

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 2014 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 1.0 million and 1.5 million. 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 $62 for VeriSign. We will update the price estimate after the earnings release.

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VeriSign’s Recent Marketing Efforts Can Impact Q1 Positively

VeriSign increased its year-on-year marketing spending by 3% to $92 million in 2014 (as against a 9% year-on-year 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 are mainly concentrated on increasing ARPU. ^[2] VeriSign is also investing in international markets with potential for its growth. It has applied for International Domain Names (IDN) for overseas market. Hence, once they’re available, it plans to spend on partnering with overseas registrars.

In mid 2014, 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 U.S. The .com and .net domains would be among its offerings. Hence, the management believes that Google acting as a “retail outlet” for their products will greatly aid in expanding its reach.

Going further, we believe VeriSign needs to partner with registrars committed to increasing awareness for the .net brand, especially in the developing countries, where the scope for growth is high due to both huge under-served populations and rising Internet penetration. Marketing is imperative in such a competitive market space, where the gTLD market crossed 3 million recently. ^[3]

.net Demand Could Be Further Dampened Due To Price Hikes

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. ^[4] 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,  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   400 odd newly introduced  gTLD are so numerous as to generate confusion.  Accordingly, their brand value did not make a dent in .net’s demand, We note 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 with the hike in prices from $6.18 to $6.79 occurred  in 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.

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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. Research suggests consumers are ready to embrace new gLTDs, World Trademark Review, October 2014 [↩]
4. VeriSign’s Q3 2014 Earnings Call Transcript, Seeking Alpha, October 2014 [↩]