Is Verisign Fairly Valued?

by Trefis Team
-11.93%
Downside
195
Market
171
Trefis
VRSN
VeriSign
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Verisign (NASDAQ: VRSN) reported solid financial results in FY 2018, driven by growth in domain name registrations and improved renewal rates compared to the previous year, a trend which we expect to continue into 2019. In Q4, the company comfortably beat earnings estimates ($1.21), with non-GAAP earnings of $1.58 which surged 64.6% from the year-ago quarter. Revenues increased 4.1% year over year to $307.5 million but failed to meet the top-line mean consensus estimates of $309 million.

We currently have a price estimate of $171 per share for VRSN, which is approximately 10% behind the current market price. We have summarized our full year expectations for VRSN based on the company’s guidance and our own estimates, on our interactive dashboard Verisign’s Fiscal 2019 Outlook. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Internet and software company data here.

Key Performance Metrics From Fiscal 2018

  • Verisign recorded revenues of $1.2 billion in 2018, which represents an increase of 4% compared to 2017 while operating income surged by 8% to $767.4 million.
  • The company added 38.2 million new domain name registrations for .com and .net, ending 2018 with 153 million .com and .net registrations in the domain name base, an increase of 4% from 2017.
  • Non-GAAP EPS increased by 29% year-over-year to $4.75 in 2018 thanks to the impact of lower taxes, surge in non-operating income and share repurchases.
  • Net income grew by 27.5% primarily due to one-time pre-tax gain of $55 million recognized on the sale of Verisign Security Services customer contracts.

Other Key Factors and Earnings Guidance For FY 2019

  • Verisign entered into Amendment 35 to the Cooperative Agreement, allowing VeriSign to engage with ICANN to amend the COM Agreement and to raise .com registration and renewal prices 7% in the back four years of each six-year period. Thus, providing Verisign with more pricing power.
  • VeriSign also renewed its contract with ICANN to remain the sole .net operator until 2023, which should further aid growth in domain name registrations – as more companies rely on growing their businesses digitally.
  • The company completed the sale of its Security Services Business, primarily comprising of Distributed Denial of Service Protection and Managed DNS services, to Neustar with the objective of focusing more on its core domain name registry services business.
  • For FY 2019, Verisign expects revenue to be in the range of $1.215 billion to $1.235 billion, partially offset by the loss of revenue associated with the sale of Security Service customer contracts.
  • Non-GAAP operating margin is expected to be between 67.5% to 68.5%, while EPS is expected to grow by 10% to $5.20 in 2019.
  • Moreover, the company expects its domain name base growth rate to be between 2.25% and 4.25% for full year 2019.
  • We estimate the fair value for Verisign’s stock to be $171 based on our Non-GAAP diluted EPS estimate of $5.2 for full-year 2019, and using a forward P/E multiple of 33x.

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