Neutral on VeriSign - Analyst Blog

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We recently reiterated our Neutral recommendation on VeriSign, Inc. ( VRSN ).

VeriSign recently reported first-quarter earnings of $0.37 per share, missing the Zacks Consensus Estimate of $0.39. Results missed the Zacks Consensus Estimate by $0.02.

There is no consensus among analysts covering the stock. Three out of the six analysts decreased their estimates while two analysts upped theirs. 

Consequently, the estimates for 2012 have come down by 1 cent in the last thirty days. Estimates for 2013 are also down by 5 cents. 

Internet Corporation for Assigned Names and Numbers (ICANN) recently renewed Verisign's contract to serve as the authoritative registry operator for the .net registry until 2017. Moreover, ICANN recently announced its plan to increase the number of generic top-level domains. At the end of March 2012, ICANN posted renewal terms negotiated between Verisign and ICANN for the .com Registry Agreement.

Verisign applied for 14 new gTLDs including 12 transliterations of .com and .net through ICANN's new gTLD application process. This is expected to close in May 2012. Additionally, applicants for approximately 220 new gTLDs selected Verisign will provide back-end registry services. This bodes well for VeriSign in the long run as revenue from new gTLDs is not expected to be material before 2013.

VeriSign views the introduction of new gTLDs as an adjacent growth opportunity. This should positively impact results in the coming years.  As of January 15, 2012, the registry fee for .com domain names will increase from $7.34 to $7.85, and the registry fee for .net domain names will increase from $4.65 to $5.11. The fee increases should positively impact revenues in 2012.

In 2007, VeriSign decided to focus more on its core competencies to provide highly scaleable, reliable and secure Internet infrastructure services to customers around the world. In 2011, VeriSign completed its four-year restructuring plans, which included divesting or winding down non-core businesses, the sale of Authentication Services business, while relocating its headquarters.

Meanwhile, the company has a healthy cash balance with recent divestitures and is making efforts to return the same to investors. In 2011, VeriSign repurchased 16.3 million shares for $535 million. The company has approximately $831 million shares left under its current share authorization program.

However, top-line growth continues to be a challenge. The company divested all of its 13 non-core businesses and at present has just one significant business: Naming Services. It remains to be seen how the streamlined company generates a growth trajectory given the change in management.

We maintain our Neutral recommendation as we believe that most of the positives are already discounted at current levels. Our Neutral recommendation is supported by Zacks #3 Rank, which translates into a short-term rating of Hold.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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