Domain Name Registrations Drive Top-Line Growth For Verisign In Q1, But The Shares Look Overvalued

by Trefis Team
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Trefis
VRSN
VeriSign
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Verisign (NASDAQ: VRSN), a global provider of domain name registry services and internet infrastructure, released its Q1 2019 results late last week. The company beat market expectations for revenue as well as earnings – sending its shares nearly 6% higher to above the $200 mark for the first time in nearly two decades. However, Trefis estimates the fair value of Verisign’s shares to be around $172, which is roughly 15% below the current market price.

Verisign’s revenues were upbeat primarily thanks to a 5% increase in the domain name base for .com, and an increase in the .net domain name registration fees. Also, Verisign’s EPS came in at $1.35, up 24.6% year-over-over, mainly due to lower expenses. We have summarized our key expectations for the company’s full year in our interactive dashboard – How Did Verisign Fare in Q1 And What Is the Outlook for Full Year? In addition, here is more Trefis Internet and software company data.

Key Takeaways From Verisign’s Q1 results

Domain Name Registrations Continue To Rise

  • Verisign ended the first quarter of 2019 with 154.8 million .com and .net domain name registrations in the domain name base, up 4.4% from the end of the first quarter of 2018. This represents a net increase of 1.82 million registrations.
  • Growth in the domain name base has been primarily driven by continued internet growth as well as by marketing activities carried out by the company and its registrars, slightly offset by increased competition from country code top-level domains and ongoing changes in the internet practices and behaviors of consumers and businesses.
  • We forecast the domain name base to grow in the low single-digit range in the near term mainly due to a strong internet adoption rate, global economic growth, increasing e-commerce activity, and registrar go-to-market strategies. Moreover, improving renewal rates and the company’s ability to hike the price for .com registrations and renewals should aid the company’s top-line growth in near term.

Improving Margins

  • Verisign’s operating margin increased from 62% in Q1 2018 to 65.4% in Q1 2019 primarily driven by higher-than-expected revenues and lower sales and marketing expenses. Net margin also improved to 53% as compared to 45% in the year ago quarter.
  • In addition, Verisign entered into Amendment 35 to the Cooperative Agreement, allowing it to engage with ICANN to amend the COM Agreement and to raise .com registration and renewal prices 7% in the latter four years of each six-year period. This will help the company charge a higher price for its products and, in turn, improve its margins.

Full Year Forecast

  • For full-year 2019, Verisign expects its revenues to be in the range of $1.2 to $1.3 billion while its non-GAAP operating margin is expected to be between 67.5% to 68.5%.
  • We project net margin to improve from 48% in 2018 to 51.5% in 2019. This can be primarily attributed to strong revenue growth, improving operating leverage and a lower effective tax rate.
  • Based on our forecast, Verisign’s adjusted EPS for full-year 2019 is likely to be around $5.36. Using this figure with our estimated forward P/E ratio of 32x, this works out to a price estimate of $172 for Verisign’s shares – indicating that the company’s shares are roughly 15% overvalued.

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