VeriSign Posts Strong Q3 with Earnings, Revenues Up Y/Y - Analyst Blog

VeriSign Inc. (VRSN), a leading name in a global provider of domain name registry services, reported third-quarter 2014 earnings (excluding all one-time items but including stock-based compensation) of 81 cents per share, which increased 35% from 60 cents in the year-ago quarter. The strong growth was primarily driven by higher revenues and margin expansion.

Revenues

Revenues increased 4.7% year over year to $255.0 million, marginally beating the Zacks Consensus Estimate of $254.0 million. VeriSign Registry Services added 1.15 million net new names. Active domain names in the zone for .com and .net increased 3.3% year over year in the reported quarter (14.9 million .com names and 15.1 Million .net names).

VeriSign processed 8.7 million new domain name registrations for .com and .net, up from 8.3 million in the year-ago quarter.

VeriSign's renewal rate for the second quarter was 71.8%, down 90 basis points (bps) year over year. Renewal rate for the third quarter is expected to be 72% compared to 72.7% in third quarter 2013. Exact renewal rate figures will be available 45 days after the end of the quarter.

Margins

As a percentage of revenues, total operating expenses decreased to 45.3% in the second quarter compared with 45.5% in the year-ago quarter.

On a year-over-year basis, sales & marketing (S&M) expenses increased 10 bps, while research & development (R&D) expenses decreased 80 bps, overall leading to the decline in operating expenses.

Operating income stood at $139,500, up 23.9% year over year. Operating margin was 54.7% in the reported quarter compared with 54.5% in the year-ago period. The expansion in operating margin was primarily due to lower operating expenses.

Balance Sheet & Cash Flow

Cash and cash equivalents (including marketable securities) were $1.47 billion compared with $1.72 billion in 2013. Operating cash flow was $430.5 million in the reported quarter, compared with $432 million in the year-ago quarter. Free cash flow was $149.7 million compared with $134.3 million in the year ago quarter. VeriSign repurchased approximately $226.0 million shares in the reported quarter.

Guidance

VeriSign expects Domain Name Base addition for the fourth quarter to range between 0.7 million and 1.2 million net names.

For 2014, VeriSign forecasts revenues in the range of $1.006 to $1.011 billion, which represents an annual growth rate of 4.5% (previous guidance was $1.003 to $1.012 billion).

Non-GAAP gross margin is expected to be at least 80%, while operating margin is forecast to be between 60.0% and 61.0% (up from 59.0% and 61.0%).

Interest expense and non-operating income, net is expected to be within the range of $76.0–$80.0 million for 2014.

Capital expenditure is expected in the range of $45.0 to $55.0 million (previous guidance $50.0 to $60.0 million) for 2014.

Our Take

We believe the 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 in developing new intellectual properties will boost revenues and profitability, going forward.

Additionally, VeriSign expects its network security products to offer significant growth opportunities 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 near-term headwinds.

Moreover, entry of Google (GOOG) in the market will intensify competition over the long run. Further, significant competition from AT&T Inc. (T) and Verizon (VZ) in the NIA segment remains a major concern.

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