VeriSign Inc. (
reported second-quarter 2013 earnings of 55 cents, which beat the
Zacks Consensus Estimate by a couple of cents. Earnings
(including stock-based compensation) increased 22.5% year over
year but declined 4.6% sequentially.
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Revenues surged 11.8% year over year and 1.2% sequentially to
$239.3 million, slightly ahead of the Zacks Consensus Estimate of
$237.0 million. Approximately 60% of the revenues were from the
U.S, while the remaining came from overseas. Both U.S. and
international revenues increased 12.0% from the year-ago quarter.
VeriSign Registry Services added 1.22 million net new names
compared with 1.99 million in the previous quarter. Active domain
names in the zone for .com and .net increased 4.9% year over year
to $124.3 million (.com 109.2 million and .net 15.1 million) in
VeriSign processed 8.7 million new domain name registrations for
.com and .net, slightly down from 8.9 million in the year-ago
quarter and 8.8 million in the previous quarter.
VeriSign estimates renewal rate to be approximately 72.4% in the
second quarter compared with 72.9% in the year-ago quarter. Exact
renewal rate figures will be available post 45 days of the end of
the quarter. In the first quarter of 2013, renewal rate was
During the quarter, VeriSign hiked fee for .net domain names from
$5.62 to $6.18, effective from Feb 1, 2014, as per its agreement
with Internet Corporation for Assigned Names and Numbers (ICANN).
As a percentage of revenues, operating expenses declined to 44.8%
in the second quarter compared with 50.0% in the year-ago quarter
but increased from 43.6% in the previous quarter.
A sharp decline in sales & marketing (S&M) as well as
general & administrative (G&A) expenses, down 260 basis
points ("bps") and 210 bps, respectively, drove the
year-over-year decline. Research & development (R&D)
expense declined a modest 10 bps from the year-ago quarter.
The sequential rise in operating expense as a percentage of
revenues was primarily due to a 20 bps expansion in G&A and a
200 bps upside in S&M, which offset a 60 bps decrease in
Operating margin was 55.2% in the quarter, compared with 50.0% in
the year-ago quarter and 59.6% in the previous quarter. The
year-over-year improvement was primarily due to lower operating
expenses. However, sharp rise in operating expenses on a
sequential basis negatively impacted operating margin.
Net income as percentage of revenues was 36.1% compared with
32.9% in the year-ago quarter and 37.9% in the previous quarter.
Balance Sheet & Cash Flow
Cash and cash equivalents (including marketable securities) were
$2.00 billion (out of which $630.0 million was held in the U.S.)
compared with $1.56 billion in the previous quarter. The
significant rise in cash balance was primarily due to the
issuance of 10-year $750.0 million senior unsecured notes in Apr
Operating cash flow was $147.0 million in the quarter, down from
$150.6 million in the first quarter. Free cash flow was $132.0
million compared with $145.0 million in the previous quarter.
VeriSign repurchased approximately 7.1 million shares for $334.0
million in the quarter. The company's board of directors approved
an additional $519.0 million to buy back shares, which brings the
total authorization to $1.0 billion.
VeriSign intends to focus more on developing new revenue streams
in 2013. The company expects to add 1.0 to 1.4 million net new
names in the .com and .net registry for the third quarter of
For full year 2013, VeriSign forecasts revenues in the range of
$952.0 to $962.0 million (up from prior outlook of $945.0 to
$960.0 million), which represents an annual growth rate of 9.0%
to 10% (up from 8%). Non-GAAP gross margin is expected to be at
least 80%, while operating margin is forecast to be between 58.0%
and 59.0% (up from at least 57%).
Interest expense and non-operating income, net is expected to be
within the range of $60.0-$62.0 million for fiscal 2013. Capital
expenditure is expected in the range of $60.0 million to $80.0
million for fiscal 2013.
We believe that the hike in.net fees will drive VeriSign's
top-line growth going forward. Additionally, growing generic
top-level domain ("gTLD") customer base, international expansion
through IDNs (internationalized domain names) and strong growth
in the Network Intelligence and Availability ("NIA") services
will further boost revenues and profitability.
However, negative impact of search engine adjustments on domain
monetization and increasing marketing expenses related to the
introduction of new gTLDs and IDNs remain the primary headwinds
in the near term. Moreover, the ongoing cash repatriation issue
remains a concern with respect to liquidity in the near term.
Although the recent debt issue improves liquidity, we believe
that higher interest rates will hurt profitability in the near
term. Additionally, significant competition from
AT&T Inc. (
Infoblox Inc. (
in the NIA segment remains a major concern.
Currently, VeriSign has a Zacks Rank #3 (Hold).