VeriSign Earnings Preview: Slower Net Registrations Could Hurt Earnings, But 2016 Looks Bright

VeriSign (NASDAQ:VRSN) is all set to release earnings for Q4 2015 on February 11th. The company performed solidly last quarter, seeing higher revenues and increased .com and .net registrations year over year. Given the current momentum, it seems likely that Q4 saw similar growth figures as well. Analysts expect EPS from the quarter to come in at $0.82 (which is almost a 100% increase from the same period last year). This does give investors some confidence going into the earnings and paints a hopeful picture of what one can expect from the company going forward.

Highlights from Q3:

• The company reported revenues of $266 million last quarter, which is a 4.2% increase year over year.
• Additionally, VeriSign delivered a strong financial performance which included a free cash flow of about $157 million.
• During the quarter, the company processed about 9.2 million domain registrations and added close to 1.62 million net new domain names ending with a total of 135.2 million.
• It also repurchased close to 2.3 million shares in the last quarter for a cumulative price of $156 million. ^[1]

Historically, the fourth quarter tends to have lesser domain registrations due to seasonal variations. Additionally, the company anticipates a slower registration rate in Asian markets like China, due to the current economic conditions there. For these reasons, the management expects the new domain registrations for the quarter to lie between a modest 1.1 million and 1.6 million in the current quarter.

The company had also narrowed down its guidance for FY15 in the previous quarter. The management guided revenues for the year to lie between the $1.050 billion to $1.055 billion range (reflecting an annual growth of about 4.0% to 4.5%).

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Good Net Adds in Q4:

VeriSign has seen good business coming in from certain Asian markets in the last couple of quarters. This has been primarily driven by higher growth economies including India, China, Vietnam and Indonesia. However, the company expects this growth to slow down sequentially in the region in the fourth quarter due the adverse macro economic conditions there. Despite this though, as mentioned before, the management expects the number of net additions to lie between the 1.1 million to 1.6 million range, which is significantly up from 700,000 achieved in Q4 2014.

In addition, internet adoption all across the globe is increasing at an unprecedented rate. As of the latest data available, almost 45% of the world’s population has internet access nowadays. This is driven primarily by the rise of affordable smartphones and cheap data packs in emerging economies. For instance, in India, the number of internet users in the last five years has jumped from about 180 million people to 380 million people as cheaper smartphones have flooded the market. Furthermore, e-commerce activity has increased significantly in the recent past. Sales from e-commerce now account for almost 6.6% of the total retail sales of  about $24 trillion. Given the trend of online sales right now, this proportion is bound to increase going forward, which could lead to higher domain name registrations in the future.

Internationalized Domain Names:

VeriSign has also been working on rolling out internationalized domain names (IDN) so that users can access sites in languages other than English. In the last earnings call it was announced that the company will begin a phased roll out of such domain names towards the end of 2015. The company has decided to introduce its first IDN, .コム, which is a Japanese transliteration of .com. Based on an investor conference call made by the company’s CEO in December, it seemed that VeriSign was planning to adopt a declining price “Early Access” model for existing .com domains to secure registration with the new IDN in phases, the most substantial of which is termed “landrush”. In actuality though, the Virginia based company is utilizing a “first come, first served” landrush which doesn’t use a declining price model. This model basically allows potential customers to register a domain name at a higher-than-normal price. It is also anticipated that VeriSign will add a premium price to such second level domain names, much like other high level domain name companies have done. ^[2]

Since this is a first of its kind introduction, speculating on what might actually happen in the future seems unfounded. However, it appears that if .コム succeeds in garnering enough attention, IDNs could actually pave the way for higher demand which could lead to a substantial growth in revenues going forward.

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1. VeriSign’s Q3 2015 Earnings Call Transcript, www.seekingalpha.com [↩]
2. Verisign IDNS: Landrush Details and Premium Domains, www.domainnamewire.com [↩]