Domain Name Registrations Drive VeriSign’s 3Q Results; Announces Neustar Deal To Focus On Core Business

As expected, VeriSign (NASDAQ:VRSN), a leader in domain names and internet security, posted a solid improvement for the September quarter last week. The company reported a steady growth in its revenue as well as earnings driven by the growth in domain name registrations and improved renewal rates compared to the previous year. Further, the company announced its agreement with Neustar to sell the customer contracts of its Security Services business. This deal, coupled with the company’s leading position in the highly regulated domain industry, is expected to drive its value in the coming quarters.

We have a price estimate of $140 per share for the company, which is lower than its current market price. View our interactive dashboard – VeriSign’s Outlook For 2018 – and modify the key drivers such as revenue and margins to gauge the impact on the company’s valuation.

Key Highlights of 3Q’18 Results

• At the end of September, the company’s domain name base in .com and .net grew to 151.7 million, an addition of 2 million names. Further, the company processed 9.5 million new registrations during the quarter. This robust growth in domain name base enabled VeriSign to report 3Q revenue of $306 million, 4.6% higher compared to the last year.
• Although renewal rates are not fully measurable until 45 days after the end of the quarter, the renewal rate for the quarter is expected to be around 75%, up from 74.4% in the year-ago quarter.
• The company’s operating income in 3Q’18 grew to $195 million from $181 million in the same quarter of last year. Accordingly, the operating margin for the quarter rose to 63.8% compared to 61.9% in the year ago quarter.
• Verisign’s adjusted net income for the third quarter was $151 million, translating into earnings of $1.23 per diluted share, higher than $1.18 per share reported in the third quarter of 2017.
• During the third quarter, the company repurchased 1.1 million shares for $175 million.
• VeriSign now expects its full year 2018 domain name base to grow between 4.2% and 4.6%, with 0.9-1.4 million net additions to the domain name in the fourth quarter. Consequently, the company expects its full year revenue to be in the range of $1.211-$1.216 billion, higher than its previous guidance of $1.205-$1.215 billion.
• Further, the company expects its Non-GAAP operating margin to be between 67% and 67.5%, up from its prior expectation of 66%-67%.

Neustar Deal

With an aim to focus on its core operations, the company has entered into an agreement with NeuStar for the sale of all its customer contracts related to its Security Services business. Neustar is a US-based technology company that has the domain name registry for .biz, .us, .co and .nyc. The deal will include the sale of VeriSign’s customer agreements related to its Distributed Denial of Service Protection, Managed Domain Name System (DNS), DNS Firewall, and Recursive DNS services.

VeriSign will retain its proprietary technology, network assets, critical infrastructure, software, and public DNS service to focus on providing critical internet infrastructure, including Root Zone management, operation of .com and .net internet root servers, operation of .gov and .edu. Further, the company will continue to support the Security Services customers during the transition to Neustar. VeriSign will receive a payment of $50 million at the time of closing of the deal, plus an additional contingent amount due after the first anniversary of closing, subject to a cap of $120 million. The additional contingent amount will be based upon the successful transition of customers to Neustar during the 12-month period following closing. The transaction is subject to customary regulatory approval and is expected to close shortly following the receipt of such approval.

The deal will not only allow VeriSign to focus on its core business, but will also result in additional cash flows that the company could use to plow back into its business and deliver higher returns to its shareholders. The company’s stock gained 3.6% since the announcement of the deal and is currently trading at $138.67 per share.

Disagree with our forecasts? Create your own price estimate for VeriSign by changing the base inputs (blue dots) on our interactive dashboard.

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