Verisign's Earnings: A Plan Needed As New Rules Limit Pricing

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Verisign ( VRSN ) is scheduled to announce its fiscal year 2012 earnings on 24 January. The company had a mixed year with the Department of Commerce approving an amended contract with Internet Corporation for Assigned Names and Numbers (ICANN) for .com registry. As per the amended .com registry contract, Verisign has to now contend with a fixed .com domain registration fee for the duration of the renewed contract. You can read about how the amended contract affects our valuation for the company here . The company has already announced an increase in the .net registry fee , effective July 1, 2013 as per the contract for the .net registry.

With the erstwhile primary revenue growth driver, the .com domain registration fee fixed, we will look for the company's strategy to mitigate the expected negative impact of a fixed fee on the gross margins. Also, the company's revenue growth now is heavily dependent upon the growth in registered .com domain names. We will look for the company's plans for promoting the .com and .net domain names as the other domains gain prominence and as ICANN plans to introduce several new generic top-level domain (gTLDS).

VeriSign is primarily a domain name registrar which has the exclusive registry rights for .com and .net domains from ICANN. It competes with other domain name registry providers like NeuStar, Employ Media, and Afilias to win new, and maintain existing registry rights.

Check out our complete coverage of Verisign

Revenue Growth To Slow Down

The .com domains constitute close to ~90% of the .com/.net domain name mix, currently governed by VeriSign, and the .com registry fee together with the permitted fee hikes was the primary revenue growth driver for the company. The restriction on .com registry fee hike will result in the .com domain price staying steady at $7.85 until November 2018.

The agreement for .net domain registry permits price hikes of up to 10% per year, and with the growth of .net domain names (~9%) slightly outpacing that of .com domain names (~6%), the .net domain registry will be the primary revenue growth driver for the company. We currently estimate the growth of the combined fee to slow down to 2% annually and reach $8 by 2019.

The company's revenue has grown at 13% y-o-y to $643 million during the first nine months of the current fiscal year. We expect the growth to continue in Q4 and the annual growth to be similar. However, with the .com domain registry fee fixed, we would look for the company's plans to diversify its revenue stream over the coming years.

Gross Margins To Decline

A secondary impact of the restriction on .com registration fee hike will be on the gross margins of the company. The margins had increased steadily as the company exercised all the permitted price hikes under the contract, which ended 30 November, 2012. We expect the margins to decline steadily over the forecast period even as the company tries to maintain them at current levels by cutting down on its costs. For the fiscal year 2012, we expect the gross margins to be close to the 80% margins the company commanded during the January to September period.

New gTLDs to pressure .com's market share

ICANN is overseeing an expansion of the gTLD universe with an aim of adding 300-1000 new gTLDs every year. We expect the new gTLDs to negatively impact .com/.net market share of overall domain names. VeriSign has applied for 14 of these new TLDs.  However, the process for the introduction of these new gTLDs is expected to take time and we don't see a major adverse impact in the near term.

We have a $38 Trefis price estimate for VeriSign, which is at par with the market price.

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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.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AKAM , AMZN , GOOG , VRSN

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