VeriSign Inc. (
reported third-quarter 2013 earnings of 55 cents per share, which
beat the Zacks Consensus Estimate by a couple of cents. Earnings
(minus stock-based compensation) increased 19.6% year over year
but remained flat on a sequential basis.
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Revenues surged 9.0% year over year and 1.8% sequentially to
$243.7 million, slightly ahead of the Zacks Consensus Estimate of
$241.0 million. Approximately 61.0% of the revenues were from the
U.S, while the remaining came from overseas.
VeriSign Registry Services added 1.55 million net new names
compared with 1.22 million in the previous quarter. Active domain
names in the zone for .com and .net increased 5.0% year over year
to $125.9 million (.com 110.7 million and .net 15.2 million) in
VeriSign processed 8.3 million new domain name registrations for
.com and .net, up from 7.8 million in the year-ago quarter but
slightly down from 8.7 million in the previous quarter.
VeriSign estimates renewal rate to be approximately 72.5% in the
third quarter, flat compared with the year-ago quarter. Exact
renewal rate figures will be available post 45 days of the end of
the quarter. In the second quarter of 2013, renewal rate was
As a percentage of revenues, operating expenses declined to 45.5%
in the third quarter compared with 48.1% in the year-ago quarter
but increased from 44.8% in the previous quarter.
A sharp decline in sales & marketing (S&M) as well as
general & administrative (G&A) expenses, down 90 basis
points (bps) and 250 bps, respectively, drove the year-over-year
decline. Research & development (R&D) expense increased a
modest 30 bps from the year-ago quarter.
The sequential rise in operating expense as a percentage of
revenues was primarily due to a 140 bps expansion in G&A and
a 10 bps upside in R&D, which offset a 30 bps decrease in
Operating margin was 54.5% in the quarter compared with 52.0% in
the year-ago quarter and 55.2% in the previous quarter. The
year-over-year improvement was primarily due to lower operating
expenses. However, a sharp rise in operating expenses on a
sequential basis negatively impacted operating margin in the
Net income margin was 34.7% compared with 35.5% in the year-ago
quarter and 36.1% in the previous quarter.
Balance Sheet & Cash Flow
Cash and cash equivalents (including marketable securities) were
$1.80 billion (out of which $389.0 million was held in the U.S.)
compared with $2.0 billion in the previous quarter.
Operating cash flow was $134.0 million in the quarter, down from
$147.0 million in the second quarter. Free cash flow was $134.0
million compared with $132.0 million in the previous quarter.
VeriSign repurchased approximately 6.8 million shares for $331.0
million in the quarter.
VeriSign intends to focus more on developing new revenue streams
in 2013. The company expects to add 1.0 to 1.5 million net new
names in the .com and .net registry for the fourth quarter of
During the fourth quarter, the company expects to liquidate one
of its domestic subsidiaries for tax purpose, which may result in
an income tax benefit of $300.0 million to $400.0 million.
For full year 2013, VeriSign forecasts revenues in the range of
$960.0 to $965.0 million (up from prior outlook of $952.0 to
$962.0 million), which represents an annual growth rate of 10%
(up from the range of 9.0% to 10.0%). Non-GAAP gross margin is
expected to be at least 80%, while operating margin is forecast
to be between 58.0% and 59.0%.
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 $65.0 million to $75.0
million (revised from $60.0 million to $80.0 million) for fiscal
We believe that growing generic top-level domain ("gTLD")
customer base, international expansion through IDNs
(internationalized domain names), strong growth in the Network
Intelligence and Availability ("NIA") services and investments on
developing new intellectual properties will boost revenues and
profitability going forward.
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.
Additionally, significant competition from
AT&T Inc. (
Infoblox Inc. (
in the NIA segment remains a concern going forward.
Currently, VeriSign has a Zacks Rank #3 (Hold).