Domain registry services provider VeriSign (NASDAQ:VRSN) is scheduled to report its second quarter results for fiscal 2014 Thursday, July 24. First quarter revenues grew 5% this fiscal year compared to 15% during a similar period in fiscal 2013. For full fiscal 2014, VeriSign expects revenues to grow between 4% and 5%, lower than the 11% registered in fiscal 2013. In addition to the slowing adoption of .com and .net domain names from new customers, revenue growth slowed down rapidly in Q1FY14 primarily due to falling renewal rates.
The global domain name market registered 7.3% increase in Q4FY13 to 271 million domain names from a comparable period in FY12. During the same period, the base for country code top-level domains (ccTLDs) continued to grow faster than the .com and .net domain base. ccTLD domains notched a 12% increase to reach 123 million domain names while VeriSign’s domestic domain base of .com and .net domain names grew 5% to 127 million domain names.
In the upcoming quarter, we intend to focus on the renewal rate trajectory for VeriSign. The company has increased its sales and marketing spend to boost customer acquisition and reignite top line growth. If the current migration of new customers to ccTLDs continues and renewal rates continue declining, VeriSign’s revenue growth rates will remain under pressure in the near term. We have a Trefis price estimate of $54 for VeriSign, approximately 9% higher than its current market price of $49.
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Top Line Woes Should Continue in Q2FY14
As stated above, VeriSign’s total domain base for .com and .net domain names has grown at a decelerating pace in recent quarters. New additions into the root zone has been restricted due to the already saturated nature of the .com domain name. On the flipside, the .net domain name has not seen the same amount of traction as the .com domain name. Both these factors are contributing the slowing growth in domain base for VeriSign.
In addition to weak new customer adoption of VeriSign’s domains, renewal rates have been declining for the company due to the addition of first time renewing names.  VeriSign states that renewal rates are not fully measurable until 45 days after the completion of the quarter. For the fourth quarter of fiscal 2013, renewal rates were 0.7% lower from a prior year period at 72.2%, and are expected to decline by a similar amount to 72.6% for Q1FY14.  In terms of guidance for Q2FY14, the company expects a weak quarter with the zone growing 2-4% on a year-on-year basis before witnessing an acceleration in H2FY14.
Bottom Line Could be Lifted by Tax Benefit and Share Repurchases
VeriSign’s earnings per share (EPS) exceeded analyst expectations last quarter, boosted by a $132 million share repurchase program.The company additionally has approximately $868 million authorized for stock buybacks, and this should continue to drive earnings accretion for the company.
Additionally, the company expects the repatriation of cash to be completed earlier than the previous guidance of Q2FY14. VeriSign has cash to the tune of $700 million – $800 million held by foreign subsidiaries. Liquid assets such as cash and marketable securities are levied a repatriation tax from respective foreign governments. While this should increase taxes payable for VeriSign in Q2FY14, the pending tax claim of approximately $375 million with Internal Revenue Service (IRS) in relation to a worthless stock deduction could offset the increased tax expense and lift VeriSign’s net income for Q2FY14 and full fiscal 2014.Notes:
- VeriSign Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, April 2014 [↩] [↩]