Can VeriSign Move Higher In 2014?

VeriSign (NASDAQ:VRSN) is the world’s largest provider of registry services for .com and .net domain names. The company has a market capitalization of $6.74 billion and generated revenues of approximately $965 million in FY13. VeriSign administered a total of 127 million .com and .net registrations and renewals last year, capturing a 47% share in the global domain registry market in 2013. Gross profit margins for VeriSign stood at 81% for the recently concluded fiscal 2013, expanding steadily from 72% in FY08. This expansion in margins was facilitated by the sale of its SSL business as part of strong streamlining efforts from the company in 2009 and 2010.

Since early fiscal 2013, VeriSign’s stock has gained over 50%, driven by strong earnings performance. Revenues have grown at double-digit pace since 2008. Similarly, business streamlining efforts resulted in an expansion in margins. In this note, we analyze VeriSign’s stock to see it it could gain further value in 2014.

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Boost To Domain Registrations Share Should Take VeriSign Higher

VeriSign’s market share in the domain registrations market has declined over the years, from 52% in FY08 to 47% in the recently concluded FY13. This decline in market share for the company comes entirely from the huge size of its .com gTLD root zone. The .com domain name alone had a total of 112 million domains registered at the end of FY13, making it the single largest gTLD. This huge number of .com domain registrations has constrained growth in registrations in recent times, as businesses have found it difficult to acquire a short and suitable .com domain. Other domains, including the nation-based domains, are growing faster. This has resulted in businesses shifting to other gTLDs and ccTLDs, thereby reducing VeriSign’s market share.

In order to boost revenue growth, the company needs to build a strong base in other gTLDs that can lift its declining market share. In addition to the .com gTLD, VeriSign has contractual rights to operate registry services for .net, .tv, .cc and .name domains. Contracts for domains nearing expiry with a registry service operator are usually put for auction by the U.S. Department of Commerce (DoC) and other Internet regulatory agencies like ICANN. Acquiring such contracts for other generic TLDs that have a significant base from its competitor like Neustar should create a diverse product portfolio for the company, leading to an expansion in market share in the long term. Given the price constraints VeriSign has on its domain registrations and renewals, we believe the company could tap into its $1.7 billion reserve in cash and cash equivalents to broaden its domain registry portfolio and boost revenue growth.

On the flipside, there could be a fall in revenues if new registrations of the lower-priced .net domain outpace new registrations for the .com domain. Currently, the company has an obligation to charge $7.85 through November 2018 for a .com domain name registration, except under the case of an attack or threat of attack. Comparatively, VeriSign can charge $6.18 for a .net domain name registration and has the contractual right to increase fees for .net domain registrations by up to 10% each year through June 2017. With businesses finding it increasingly difficult to choose a domain name of their choice with a .com extension, we expect .net domain registrations to outpace .com domain registrations going forward. This should drag down overall revenue growth with higher contribution from a lower priced domain.

We have a $61 Trefis price estimate for VeriSign, which stands at a 21% premium to its current market price of $50.

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