VeriSign Earnings Preview: Saturation Of .com And Lack Of Traction For .net Likely Key Issues in the Quarter

VeriSign (NASDAQ:VRSN), the leader in the Domain Name market, is set to release its Q4 2014 earnings on February 5th. VeriSign, the authoritative registry service provider for all .com and .net gTLDs (Generic Top-Level Domains), as well as the sole registry service provider for gTLDs like .cc, .tv, .gov, .jobs, .edu and .name, enjoys a 47% market share.

The company registered a ~5% increase in sales to $754 million in the first nine months of 2014. However, the growth rate has declined considerably, compared to the same period last year, when VeriSign’s sales grew by around 12%. The reasons for the deceleration can be attributed to: 1) saturation in the .com domain; 2) a lack of significant traction in the .net domain; and,  3) intense competition from other gTLDs, especially ccTLDs (country code top-level domain names). VeriSign regained its growth momentum to some extent in Q3 2014 after a disappointing performance in the first half of the year.

In Q3 2014, The company witnessed the highest third quarter gross additions of 8.7 million to date. Some of the primary factors propelling growth in the third quarter included:  1)  the fact that one of VeriSign’s prominent U.S. registrars concentrated on customer acquisition; 2) China’s continued healthy performance which propelled  international growth; and, 3) VeriSign’s focus on marketing expense to give more exposure to its brands. VeriSign increased its year-on-year marketing spending by 6% to $68 million in the first nine months of 2014 (as against a 17% year-on-year decline in marketing spending in the first nine months of 2013). ^[1]

Our Trefis price estimate of $60 for VeriSign is almost in line with the market price .

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.com Brand’s Growth Saturation And .net Brand’s Lack Of Commensurate Traction Might Have Hurt Sales Growth In The Fourth Quarter

The .com domain name has become increasingly saturated in recent years, causing limits to new additions. In Q2’14, VeriSign processed approximately 8.5 million registrations (as against 8.7 million in Q2 2013) but could make only 0.42 million net addition into the .com domain root zone. This falls reasonably short of the 1.22 million net additions added in Q2’13.

At the end of Q2 2014, the total base of active registered domain names in .com and .net was 129 million (3.7% year-on-year growth), consisting of 113.7 million for .com and 15.2 million names for .net. ^[2]

The .net zone growth had been flat till the end of third quarter 2014. The number of active registered domain names has been almost constant for .net  since June 2013. ^[1].  Reasons for the flat growth of the .net zone were the stiff competition provided by  a rival gTLD program (which gained around 2.8 million registrations year to date) and  confusion regarding similar sounding domain names among the newly introduced gTLDs.  This adversely impacted the demand for the new gTLDs.

The demand for .net might further slow with the hike in prices from $6.18 to $6.79 scheduled for February 2015. The company is trying to make up for the lack of volume growth in the .net domain  with an increase in price to generate more revenue. However, the plan might not be sustainable in the long run. Not only can it decelerate the .net demand even further, but with the increased influx of competition in this space, the existing users might also decide to switch domains.

Marketing Expenses And Efforts Might Be Increased Both Domestically And Abroad

For the first nine months of 2014, VeriSign increased its year-on-year marketing spending by 6% to $68 million (as against a -17% year-on-year decline in similar period in 2013). The company expects the marketing expenditure to rise over the coming quarters. The company channels the majority of its marketing campaigns through affiliate registrars such as GoDaddy and BigRock, or other resellers to promote its .com and .net domain registrations and drive awareness for the brand across geographies.

VeriSign has also applied for International Domain Names (IDN) for overseas market. Hence, once they’re available, it plans to spend on partnering with overseas registrars for the marketing of its offerings.

Recently, Google announced a plan to act as a registrar and sell a package of services, including domain names, with the aim of developing online presence for smaller businesses in the U.S. The .com and .net domains would be among its offerings. Hence, the management believes that Google acting as a “retail outlet” for their products will greatly aid in expanding its reach.

Going further, we believe VeriSign needs to partner with registrars committed to increasing awareness for the .net brand, especially in the developing countries, where the scope for growth is high due to both huge under-served populations and rising Internet penetration. Marketing is imperative in such a competitive market space, where the gTLD market crossed 3 millions recently. ^[3]

VeriSign also needs to build up the .net brand, relative to the very strong  .com brand. Both .net and .com have maintained uninterrupted service (100% uptime) for well over 17 years, but the latter is far more highly branded given its greater currency. Should .net develop greater cachet  as a domain for users’ websites, increasing registrations could very well drive revenue growth for Verisign, relative to alternative providers.

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1. VeriSign’s Q3 2014 Earnings Call Transcript, Seeking Alpha, October 2014 [↩] [↩]
2. Internet Grows to 280 Million Domain Names in the Second Quarter of 2014, VeriSign, December 2014 [↩]
3. Research suggests consumers are ready to embrace new gLTDs, World Trademark Review, October 2014 [↩]