VeriSign Earnings Preview: Increased Registrations And Renewals Could Boost Revenues

VeriSign (NASDAQ:VRSN), the market leader in the domain names industry, is set to release its latest earnings on October 22. The company performed solidly last quarter, showing improvements of about 4.9% in revenues year on year, raking in $263 million. Most of the revenue was derived from its local U.S. market (61% of revenues). The increase in revenues can be attributed to higher registrations and increased renewal rates of its domain names. About 8.7 million new registrations were processed in the quarter, while almost 0.52 million net new names were added. These additions brought the total number of .com and .net domain names in the domain name base to 133.5 million. ^[1]

For Q3 15, we expect increased marketing activities and favorable economic factors to boost registrations and renewal rates, which, in turn, would help boost the top line. However, the sluggish .net registrations and renewals could prove to be a headwind.

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Increased .com Registrations and Higher Renewal Rates:

As of June 30, the total number of recorded .com and .net names were 133.5 million, with 118.5 million .com names and 15 million .net names — this indicates an increase of 3.1% year-over-year. This number has seen steady growth over the years and is expected to grow further in the coming quarters. To better understand the reason for these growing numbers, it may be worthwhile examining some of the main factors that enable growth in the domain name space.

1. Internet Adoption: As of mid-2015, about 45% of the world’s population has adopted the internet. This may seem like a smaller than expected number, but when compared to numbers from the year 2000, this percentage actually shows a significant increase. In 2000, about 361 million people were using the internet globally. Today, that number has grown by almost 806% to about 3,270.5 million internet users worldwide. Given the growth rate and the many geographies still untapped, there is great potential for further growth in internet adoption. ^[2]

2. Economic Activity: As of July of this year, the IMF expects the world economy to grow at 3.3% in 2015, which is comparable to the growth rate in 2014. ^[3] In the U.S., which accounts for almost 60% of VeriSign’s business, the GDP in the quarter ending July was a sharp 3.9%. ^[4] According to World Bank projections, the GDP for the U.S. for the year 2015 is expected to be 2.7%, up about 0.3% from 2014. ^[5] Such conditions could have a positive impact on the number of domain name registrations, which could benefit VeriSign.

3. E-commerce Activity: B2C e-commerce activity has risen greatly over the years, with 2014 recording about $839 billion in sales globally. This year, the sales from B2C e-commerce is projected to reach about $994.5 billion. By 2018, this figure is projected to climb to a mammoth $1.5 trillion. ^[6] The numbers in the U.S. e-commerce market are also growing greatly. Since 2010, e-commerce sales in the U.S. have grown by about 200%. ^[7] With such great potential in the e-commerce industry, there could be a surge in website registrations. Apart from that, existing website owners may be more likely to renew their domain names.

Given the positive effects of the factors mentioned above, it seems likely that there will be an increase in .com registrations this quarter. VeriSign has estimated net additions in the domain name space in the third quarter to range between 0.6 million to 1.1 million.

The above factors can also have a positive effect on the renewal rates. For Q2, the predicted renewal rates stood at about 72.6%. This preliminary rate compares favorably to the renewal rate in Q2 2014, which was 71.8%. It seems plausible that rates could increase this quarter, as well.

Apart from this, the company is also spending heavily to better their marketing strategies. Marketing expenditures in Q2 were about $24.3 million, which is $2 million more than the expenditure in Q1. A good marketing strategy could also aid the above factors in boosting registrations and renewals of domain names.

VeriSign’s Share of Total Domain Names

Sluggish Growth In .net Names Could Continue:

VeriSign’s market share has declined considerably over the years. The company captured about 52.5% of the market in 2007. However, in 2014, the market share had dropped to about 46.6%. This percentage is likely to go down even further in the coming years. The reasons for a fall in market share can be attributed to a saturation in the .com domain name space and a lack of .net’s widespread acceptance.

In an attempt to compensate for the flat growth in .net, the company is planning to hike prices as of February 2016. VeriSign is planning to increase the annual wholesale fee for its .net domain name to $7.46 (from $6.79). This move, however, may lead to a further fall in the sale of .net domain names as customers may shift to one of the many new gTLD competitors present in the market.

The company, however, believes that the new price hike is fair, as their competitors charge even higher prices for .net domain names. Despite the flat growth, VeriSign seems to have full confidence in its lagging legacy gTLD and doesn’t see it posing a threat to their business any time soon.

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1. VeriSign Q2 2015 Earning’s Transcript, seekingalpha.com [↩]
2. World Internet User Statistics, internetworldstats.com [↩]
3. IMF World Economic Outlook – Update, imf.org [↩]
4. United States GDP Annual Growth Rate, tradingeconomics.com [↩]
5. US GDP Growth Forecast, knoema.com [↩]
6. Global B2C E-commerce Sales, statista.com [↩]
7. US Retail E-commerce Sales, statista.com [↩]