VeriSign's Q1 Earnings & Rev In Line - Analyst Blog

Shares of VeriSign Inc. VRSN went down 4.3% in after-hours trading following its first quarter 2014 results. Shares tumbled as a result of a sequential decline in earnings, lower share count and a tepid fiscal 2014 revenue guidance provided by the company.

VeriSign reported first-quarter 2014 earnings of 58 cents per share, which matched the Zacks Consensus Estimate. Earnings (excluding all one-time items but including stock-based compensation) increased 5.5% year over year but declined 1.7% on a sequential basis.

Revenues

Revenues surged 5.2% year over year and 1.3% sequentially to $248.8 million, relatively in line with the Zacks Consensus Estimate of $249.0 million. Approximately 61.0% of the revenues were from the U.S., while the remaining came from overseas.

VeriSign Registry Services added 1.28 million net new names compared with 1.29 million in the previous quarter. Active domain names in the zone for .com and .net increased 4.0% year over year to $128.5 million (.com 113.2 million and .net 15.2 million) in the quarter.

VeriSign processed 8.6 million new domain name registrations for .com and .net, down from 8.8 million in the year-ago quarter and flat sequentially.

VeriSign estimates renewal rate to be approximately 72.6% in the first quarter, flat year over year. Exact renewal rate figures will be available 45 days after the end of the quarter. In the fourth quarter of 2013, renewal rate was 72.2%.

During the quarter, VeriSign partnered with Juniper Networks JNPR to provide hybrid cloud-based security services. The combined solution can manage and protect against Distributed Denial of Service (DDoS) attacks and at the same time connect public and private clouds securely. VeriSign has significant growth opportunities from its network security products as DDoS attacks continue to grow. We believe that VeriSign will gain significantly from this collaboration.

Margins

As a percentage of revenues, total operating expenses soared to 43.9% in the first quarter compared with 43.6% in the year-ago quarter. However, on a sequential basis, operating expenses as a percentage of revenues decreased from 47.0%.

An increase in sales & marketing (S&M) as well as general & administrative (G&A) expenses, up 50 basis points (bps) and 70 bps year over year, respectively, led to the rise in operating expenses. The sequential drop in operating expense as a percentage of revenues was primarily due to 160 bps contraction in G&A, offset by a 200 bps upside in S&M.

Operating margin was 56.1% in the quarter compared with 56.4% in the year-ago quarter and 53.0% in the previous quarter. The contraction in operating margin was primarily due to higher operating expenses on a year-over-year basis.

Net income margin was 34.1% compared with 36.6% in the year-ago quarter and 36.1% in the previous quarter.

The company also plans to repatriate approximately $700.0 to $800.0 million of offshore cash during the second quarter of 2014.

Balance Sheet & Cash Flow

Cash and cash equivalents (including marketable securities) were $1.72 billion (out of which $192.0 million was held in the U.S.) same as in the previous quarter.

Operating cash flow was $142.0 million in the quarter, down from $147.0 million in the fourth quarter. Free cash flow was $130.0 million compared with $121.0 million in the previous quarter.

VeriSign repurchased approximately 2.4 million shares for $132.0 million in the quarter. As ofMar 31, 2014, approximately $868.0 million remained authorized under the share repurchase program.

Guidance

VeriSign intends to focus more on developing new revenue streams in 2014. In 2014, VeriSign expects to pay cash taxes of approximately $35.0 to $50.0 million due to repatriation.

For 2014, VeriSign forecasts revenues in the range of $1.0 to $1.015 billion, which represents an annual growth rate of 4.0% to 5.0% (previous guidance was $1.0 to $1.02 billion). The Zacks Consensus Estimate is pegged at $1.014 billion. Non-GAAP gross margin is expected to be at least 80%, while operating margin is forecast to be between 58.0% and 60.0%.

Interest expense and non-operating income, net is expected to be within the range of $73.0–$77.0 million for 2014. Capital expenditure is expected in the range of $50.0 to $70.0 million (previous guidance $60.0 million to $80.0 million) for 2014.

Our Take

VeriSign reported in-line first-quarter results and provided a tepid fiscal 2014 guidance. The company's top and bottom lines increased year over year.

We believe growing generic top-level domain (gTLD) customer base, international expansion through IDNs (internationalized domain names), strong growth in the Network Intelligence and Availability (NIA) services and investments on developing new intellectual properties will boost revenues and profitability, going forward.

Additionally, VeriSign has significant growth opportunities from its network security products as Distributed Denial of Service (DDoS) attacks continue to grow.

However, the negative impact of search engine adjustments on domain monetization and increasing operating expenses related to the .com contract renewal remain the primary headwinds in the near term. Moreover, significant competition from AT&T Inc. T and Verizon VZ in the network intelligence and availability (NIA) segment remains a major concern.

Currently, VeriSign has a Zacks Rank #3 (Hold).