VeriSign Earnings: Asian Markets Bolster Acceleration In Domain Name Registrations, While Disinvestments Help Increase Revenues

VeriSign (NASDAQ:VRSN) released their earnings for Q3 on October 22. The company’s revenues grew by 4.2% year-over-year to reach $266 million, while recording a non-diluted earnings per share of $0.78 (exceeding the analyst consensus of $0.77). This growth in revenues is attributed to the high number of domain name registrations that were processed by the company in emerging markets — especially in Asia. The predicted renewal rate for this quarter stands at 71.8% (same figure as Q3 last year) and slightly lower than the figure reported last quarter (72.7%). The NON-GAAP operating margin stood at 62.7%, which is marginally higher than the figure reported the same quarter last year (60.6%). All in all, VeriSign can boast of a solid quarter. ((Verisign Reports Third Quarter 2015 Results, seekingalpha.com))

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Higher Registrations Boost Revenues:

The company recorded very high registrations this quarter, with the gross figure standing at almost 9.2 million (net additions were recorded at 1.68 million) bringing the total .com and .net registered domain names to 135.2 million. This mammoth figure can be attributed to the increased activity in Asian markets like China, India, Indonesia, and Vietnam, in particular. The number of registrations in these countries has increased considerably this quarter and is expected to grow in the coming quarters as well. One reason could be that emerging markets usually benefit from high volume, positive economic activity, with good economic growth figures. These countries also have relatively low internet adoption which has also seen increases in the recent years due to better per capita income and increased purchasing power. If the economies here continue to perform well, the number of people connected to the internet is bound to increase. Internet adoption is integral and directly proportional to domain name registrations.

One must also take into account the high potential for increased e-commerce activity in the region. Asia-Pacific is the largest market for B2C e-commerce. The region surpasses developed markets like North America and Western Europe in terms of digital sales. Asia is also home to three of the seven largest e-commerce markets, with China being the largest in the world, accounting for close to $426.26 billion in sales in 2014. ^[1] Due to the high potential, more and more companies are increasing their presence online, as well as offering their products for sale digitally. This could also be a contributing factor to explain the greater number of domain name registrations in the region. ^[2]

In spite of the improved performance in the emerging Asian economies, however, VeriSign believes that there will be a fall in the number of domain name registrations next quarter. The company has given a guidance of about 1.1 million to 1.6 million net additions in Q4 citing a historic pattern wherein Q4 has had lesser net additions than Q3 for a few years consecutively. That being said, however, Q4 2014 saw only 700,000 net additions, which means that this guidance predicts a heavy year-on-year growth.

It would also be worthwhile to talk about the effect on renewal rates in our discussion of emerging markets. Despite the high registration number, the company predicts a relatively lower renewal rate (71.8%) when compared to last quarter (72.7%). This is primarily due to lesser first time renewals in emerging markets where the start-up conversion rates are low. The company also cited that historically, there has been a dip in the renewal rates in the third quarters over the years.

Divestment Strategy Bearing Fruit:

VeriSign completed their divestitures in 2010. The company’s strategy was to simplify their business through divestment of non-core assets and by focusing on increased profitability and value creation. The results of this move are fairly visible today with the top and bottom lines showing marked improvements for 20 quarters consecutively. To put this growth into perspective, it would be worthwhile to compare the numbers:

• NON-GAAP EPS has risen from $0.31 in Q4 2010 to $0.78 in Q3 2015.
• Operating margin has risen significantly from 44.3% in Q4 2010 to 62.7% in Q3 2015.
• In the specified time period, the company has given back almost $4.2 billion to its shareholders through share repurchases and special dividends.

Given the success of the current strategy and continually increasing registrations (especially .com) in the domain name space, it seems highly plausible that the company could continue to enjoy high revenues, while shareholders could continue to benefit from the company’s positive performance through share repurchases and dividends, in the quarters to come.

Update On The IDN Rollout: At present, VeriSign is on track in their IDN rollout plan. The company plans on a phased rollout with at least one of the 11 new IDNs entering the market by the end of the year. The strategy for the rollout is still not certain and management is reluctant to mention any specifics, however they did mention that it is highly dependent on various factors like readiness of the product, ICANN processes, and market analysis. Hopefully, we will have better clarity and performance insights in the next quarter’s results.

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1. Top 10 E-commerce Markets By Country, gowithtrellis.com [↩]
2. Asia-Pacific B2C E-commerce Market 2015, businesswire.com [↩]