VeriSign Q2 2015 Earnings Preview: Renewal Rate Growth Expected As VeriSign Continues Boosting Its Marketing Spend

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VRSN: Verisign CA logo
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Verisign CA

VeriSign (NASDAQ:VRSN), the market leader in the domain name industry, is slated to release its earnings on July 23. After witnessing a sluggish period last year, boosted by its marketing activities, the company started recovering towards the end of 2014. The healthy performance carried on in Q1 2015 and we expect it to continue further in the second quarter, as well. For Q1 2015, VeriSign’s revenue was $258 million, reflecting a 3.9% year-on-year growth. The top line boost was due to a growth in its registrations and the renewal rates of its domain names. [1] For Q2 2015, we expect VeriSign’s marketing activities to carry on in full swing and that might lead to a growth in its renewal rates. However, the flat demand for its .net domain can carry on for a while with the increasing proliferation of competitors in the domain name business.

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

See our complete coverage of VeriSign

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Renewal Rate Growth Expected To Continue

Renewal rates were a concern for the company towards mid 2014, however, it started improving towards the end of last year. 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 predicts growth to the tune of 73.5% in Q1 2015, reflecting a 90 basis point growth over Q1 2014. The renewal rates for both international and domestic users are expected to rise. VeriSign derives 69% of its sales from the U.S. and 31% from international markets. The strong brand appeal of .com coupled with the growth experienced in Asia could be the two most important driving factors for renewal rates’ growth. [2]

Marketing Spending Might Continue Witnessing Growth 

In a move to increase its market share and consolidate its dominant position in the industry, VeriSign ramped up its marketing efforts in 2014 and the trend still continues. VeriSign 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’s marketing campaigns are executed by affiliate registrars such as GoDaddy and BigRock, or other resellers who promote its .com and .net domain registrations and drive awareness for the brand across geographies.

Post a sluggish period in its business, VeriSign’s performance recovery towards the end of 2014 was largely due to the registrar marketing activities. Currently, the marketing focus is on increasing average revenue per user (ARPU). We expect the marketing spending to continue with its year-on-year growth in Q2 2015, as well.

VeriSign’s .net Demand Expected To Remain Flat Or Show Slight Improvement

VeriSign is on the lookout to increase the demand for its .net brand, which till now doesn’t enjoy the popularity of its .com brand. The saturation of its .com domain restricting new additions and the lack of .net’s widespread acceptance was responsible for the decline of VeriSign’s global market share in the domain names business.

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, almost the same number since 2013. [3]

The proliferation of competition in the domain names industry, along with price hikes from $6.18 to $6.79 for .net since February 2015, might further contribute to the lackluster demand for .net.

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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. VeriSign’s Q4 2014 Earnings Call Transcript, Seeking Alpha, October 2014 []