Verisign Earnings Preview: Strong growth expected to continue

Verisign (NASDAQ:VRSN) is scheduled to announce its Q2 2012 earnings on July 26. It reported revenues of $205.7 million in Q1 2012 which was a 13.3% year-on-year increase. We currently have a $41.60 Trefis price estimate for Verisign, which stands slightly below the current market price. Verisign is a domain name registrar which has the exclusive registry rights for .com and .net domains from ICANN. Its .com and .net domain registration business accounts for nearly 90% of Verisign’s value. Verisign competes primarily with other domain name registrars such as NeuStar, Employ Media, and Afilias to win new and maintain existing registry rights. Check out our complete coverage of Verisign

Focus on .com and .net domain registrations to continue for the time being

Since almost all the company’s revenues are generated from domain registrations, the growth in .com and .net domain registrations will continue to remain the major driver for Verisign’s revenues. Verisign reported 116.7 million active .com and .net domains in the first quarter of 2012. We expect the number of net active .com and .net domains to reach approximately 120 million by the end of 2012.

The number of total domains has been increasing rapidly, but we expect .com and .net domains as a percentage of all domains to decline as other top level domains become popular. A major development this quarter was ICANN’s announcement regarding the expansion of generic top-level domains. It received 1930 requests for new domain names and will start releasing new domains in groups of 500 after March 2013. This is likely to slow growth in the number of .com and .net registrations as businesses shift their preference to domain names that correspond closely to what they actually do (e.g. “.autoinsurance”, “.google” and “.poker”). Verisign, however, seems to be benefiting from this shift as applicants for 220 of the newly proposed top level domains have signed up with the company to provide back-end registry services.

In addition, the company has itself applied for 14 new top-level domains, 12 of which are transliterations of .com and .net. Revenues from these new domains are likely to be generated only after March 2013. Therefore, the market does not expect any impact to the share price in the near term from this shift. We will be looking for any announcements related to this shift during the earnings call.

Verisign also renewed its agreements with ICANN to manage the .com and .net domains for another 6 years, with the right to hike fees by 7%  in any 4 years of the contract duration. This secures its bread-and-butter revenue stream for the next 6 years.

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