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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