VeriSign (VRSN) Q1 Earnings Up Y/Y, Sales Top, View Raised

VeriSign Inc. VRSN, a global provider of domain name registry services, recently reported first quarter 2016 adjusted earnings of 77 cents a share, up from 69 cents reported in the year-ago quarter.

The company reported non-GAAP earnings of 85 cents per share compared with 74 cents in the year-ago quarter.

Revenues increased 9.1% year over year to $281.9 million, easily surpassing the Zacks Consensus Estimate of $278 million.

In the quarter, VeriSign Registry Services added 2.65 million net new names. Domain names in the zone for .com and .net together grew 7.1% year over year in the reported quarter to 142.5 million. VeriSign processed 10 million new domain name registrations for .com and .net, an increase from 8.7 million in the year-ago quarter.

VeriSign's renewal rate for the last quarter was 73.3%, up 80 basis points (bps) year over year. For the reported quarter, the exact renewal rate figures will be available after 45 days from Mar 31, 2016. However, the company estimates it to be 74.2% compared with 73.4% in the year-ago quarter.

Margins

VeriSign reported non-GAAP operating income of $178.5 million, up from $154.4 million in the prior-year quarter. The company's non-GAAP operating margin was 63.3% in the quarter, up from 59.7% in the prior-year quarter.

Non-GAAP adjusted EBITDA was $196 million compared with $171.1 million in the year-ago quarter.  

Other Financial Details

Exiting the quarter, the company's cash and cash equivalents (including marketable securities) were nearly 1.896 billion compared with $1.915 billion at the end of 2015.

Operating cash flow in the year was approximately $143.6 million, up 8.3% year over year.

VeriSign repurchased approximately $150 million worth of shares in the quarter. As of Mar 31, 2016, the company had $916 million available under the current share repurchase program.

Guidance

For 2016, VeriSign forecasts revenues in a range of $1.125 billion to $1.140 billion (earlier expectation was $1.110 billion to $1.135 billion). This represents an annual growth rate of 6% to 7.5%. VeriSign expects domain name base growth to be in a range of 1% to 2.5% (up from the earlier expected range of 0.5% to 2%).

It continues to expect non-GAAP operating margin between 62.5% and 64%. Non-GAAP interest expense and non-operating income, net is expected to be within a range of $110 million and $116 million (lower than the earlier projection of $114 million to $120 million).

Our Take

The renewal of the .com contract and price hikes for the .com and .net domain names drive VeriSign's top line. In addition, an expected increase in domain name base will remain a key driver of its growth.

Also, we believe that gTLD prospects, international expansion through IDNs and investments in intellectual properties will boost results over the long run. Additionally, VeriSign has significant growth opportunities in Distributed Denial of Service (DDoS) security market.

However, the negative impact of search engine adjustments on domain monetization and increasing operating expenses related to marketing remain primary near-term headwinds. Intensifying competition is an added concern.

Currently, VeriSign has a Zacks Rank #2 (Buy). Some similarly-ranked stocks in the same space include Bazaarvoice, Inc. BV, NetEase, Inc. NTES and Actua Corporation ACTA.

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