VeriSign Q1 Earnings Displayed Healthy Growth On The Back Of Increased Domain Name Registrations and Improved Renewal Rates

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VRSN: Verisign CA logo
VRSN
Verisign CA

VeriSign (NASDAQ:VRSN), the dominant player in the Domain Name market, posted its first quarter 2015 results on Thursday, April 24th. VeriSign’s revenue for the quarter was $258 million, a 3.9% increase on a year-over-year basis. GAAP operating income was $144 million, a 3% increase on a year-over-year basis. The increase in revenue can be attributed to a growth in its registrations and renewal rates of its domain names. [1] As we mentioned in our first quarter earnings preview, VeriSign’s ramped up marketing efforts seem to be bearing positive results. Though it is still early to confirm a future growth trend, it seems that the company has recovered to some extent from its erstwhile sluggishness.

In the first quarter, after processing 8.7 million new domain names, VeriSign Registry Services added 1.51 million net new names in its domain, to end with 133 million (117.9 million .com and 15.1 million .net) domain names, reflecting a 3.1% increase over the base of Q1 2014. VeriSign predicts the second quarter net additions to be between 0.3 million and 0.8 million. Past trends suggest that the second quarter witnesses the highest deletion rates, and hence the downward revision in the forecast.

For the full year 2015, the company guided revenues between $1.04 billion to $1.06 billion reflecting a 3% to 5% growth rate. The revenue range is based on the assumed 2% to 3.5% domain name growth rate. The non-GAAP operating margin is expected to remain between 60% to 62%.

We have a Trefis price estimate of $62 for VeriSign. We are in the process of updating out price estimate for VeriSign.

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Improvement In Renewal Rates

VeriSign is witnessing an improvement in renewal rates and predicts growth for Q1 2015. Renewal rates are measurable 45 days post the quarter end. The renewal rate for Q4 2014 was 72.5%, reflecting a 30 basis point increase over  Q4 2013. The company expects the renewal rates to reach 73.5% in Q1 2015, a 90 basis point increase over Q1 2014. The first time renewal rates witnessed growth in both the domestic and international fronts. The reasons can be attributed to the strong traction enjoyed by the .com brand and the growth experienced in Asia. For the previously renewed domain names, there was renewal rate growth in the international front, however, the domestic renewal remained flat. VeriSign derives 69% of its sales from the U.S. and 31% from international markets. [2]

VeriSign’s Improved Registrar Marketing Activities And Stances To Protect Market Share Might Boost Future Growth

  • Marketing Efforts Witnessed A Ramp-up Since 2014

VeriSign had increased its year-on-year marketing spending by 3% to $92 million in 2014 (as against an almost 9% decline in 2013). In Q1 2015, VeriSign’s marketing expenses witnessed a 10% year-on-year growth to reach around $22 million. [1] 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.

Last year, 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.

Towards the end of 2014, 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 investing in international markets with potential for its growth. Hence, it is making significant investments along those lines.

  • Gearing Up For Market Share Protection

The domain name industry might be gearing up for a legal battle with a spate of patent applications. Leading registrar Go Daddy has applied for 8 patents related to Domain Name System (DNS). VeriSign applied for several patents, including, technical aspects of domain name system (DNS), enhanced privacy protection, and abuse protection. Most of the patent applications cover common practices in the industry. With the huge advent of top-level domains in the market, the existing players are attempting to protect their market shares from competition by patenting common areas of touting domains.

The number of top-level domains had more than doubled in the last few months, as 500 dot-words, ranging from .london to .xyz have been added to the existing 300 domains. The number is expected to increase by an additional 500 by the end of 2015. Technology related patents help in creating entry barriers for new players. For example, if a new company becomes successful, it can be drawn into a legal battle related to patent violation by the market leaders. [3]

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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. [4]

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.

Notes:
  1. VeriSign Form 10Q For The Period Ending 03/31/15 [] []
  2. VeriSign Q1 2015 Earnings Call Transcript, Seeking Alpha, April 23, 2015 []
  3. WHY are GoDaddy and Verisign stockpiling patents? Do I smell war?, The Register, March 4, 2015 []
  4. VeriSign’s Q4 2014 Earnings Call Transcript, Seeking Alpha, February 2014 []