Verisign ( VRSN ), the provider of registry services for all .com and .net domain names, posted revenue growth of 9% annually in Q3 2013 to $244 million. We expect the company to sustain its moderate growth rate in the future, as we believe the market share of of .com and .net domain names in overall Internet domains could decline in the long-run. The restriction on .com domain fee hikes until November 2018, further supports our moderate growth outlook.
The company's net income was recorded at $81 million during the third quarter. Its operating margin rose to 54.5% as compared to 51.9% in Q3 2012, due to leverage in sales and marketing, and general and administrative expenses. We expect the company's profits to increase on an y-o-y basis in the fourth quarter as well.
.com and .net domain base continues to grow
Verisign added 1.55 million net new names during the third quarter, to end it with 125.9 million active domain names, which represented an y-o-y increase of 5%. This came in above its initial estimate of 1 million and 1.4 million net additions.
The domain name renewal rate was recorded at about 72.5% (estimated) in Q3 2013, which was flat as compared to the prior year and 20 basis points down sequentially. The renewal rate for first-time renewals continued to be affected by macroeconomic challenges in Europe and changes made to search algorithms by Google. We believe the renewal rate could see some stabilization in the near future.
Verisign's management forecasts the number of net additions to its .com and .net base to be in the range of 1.1 million and 1.5 million names in the fourth quarter. We believe the future growth rate of .com/.net domain name base will be lower as compared to the overall Internet domain name growth rate, on account of rising competition from country code domain names and the pending introduction of new gTLDs (generic top-level domains).
In the fourth quarter, Verisign expects to liquidate one of its domestic subsidiaries, for tax purposes, through which it could obtain an income tax benefit of about $300 million to $400 million.
The company is focusing its R&D resources on innovation and intellectual property strategy. It continues to file several patents for its new technologies, that support its core registry operations. We believe these activities could provide an additional revenue stream in the future, and we will look for updates on the company's IP strategy in the future.
The Internet Corporation for Assigned Names and Numbers (ICANN) plans on expansion of the gTLD universe, with the addition of around 300-1,000 new gTLDs annually. Verisign has applied for 14 of these new gTLDs, and applicants for around 220 new gTLDs had originally chosen Verisign to be their back-end registry services provider. There continues to be uncertainty regarding this process, and hence this revenue stream cannot be estimated at this stage.
We are in the process of revising our price estimate for Verisign's stock.