VeriSign's Vagaries

 | Apr 26, 2012 | 1:03 PM EDT
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After the close, dot-com registration giant VeriSign (VRSN) will report its first-quarter earnings. Here's what to watch for.

VeriSign is the "official" domain name registrar. The company holds the exclusive registry rights for the .com and .net domains from the Internet Corporation for Assigned Names and Numbers. ICANN is a private nonprofit that was created by the U.S. Department of Commerce to oversee and coordinate the management of the top-level domain space as well as operate the Internet's root servers and manage the Internet Protocol address space. VeriSign also operates the directories for all .cc, .tv and .name domain names, and it provides the back-end infrastructure for .jobs and .gov. On July 1, 2010, VeriSign raised the price to register a .com domain to $7.34 from $6.86 and a .net domain to $4.65 from $4.23. The company jacked up prices again in January 2012. Now, VeriSign charges registrars $7.85 to register a .com and $5.11 for a .net. It's a pretty sweet gig to have monopoly pricing power!

VeriSign finished 2011 with revenue of $772 million, up 13% year over year. For fiscal 2012, the company gave guidance of $865 million to $890 million in total revenue, which would represent 12%-15% growth over last year. As you can imagine, registering domain names is a hugely profitable business. For 2012, the company is expecting gross margins of at least 80% and an operating margin of between 52% and 54%.

With a domain name renewal rate of about 73.4%, VeriSign's business is highly predictable. For 2011, the company registered a net 7.9 million domains. For Q1, the company is expecting to add between 2.4 million and 2.7 million new net domain registrations. At the end of 2011, the company's entire domain name base stands at 113.8 million names, which was up 8% over 2010.

With the shares trading around 24.7x fiscal year operating earnings of $1.70, investors are willing to pay a premium for its dominant position and steady growth. (I use operating earnings, not the higher Street estimate.) But to me, VeriSign is overvalued.

Last quarter, deferred revenue was lower than expected, but investors shrugged it off and blamed it on seasonality. Watch the deferred revenue line closely tonight. Furthermore, the company is only a mid-single-digit grower -- why pay up for that? Yes, it has a fabulous top-level domain business, but that's pretty much it. The company's business is subject to erosion; there is a nonstop flood of generic top-level domains, such as .aero for the aerospace industry, .asia for Asian organizations, .museum for museums, .xxx for porn and .travel for the travel industry. The stock is trading back toward 2007 levels, when the company had nearly $1.5 billion in revenue.

While I don't think VeriSign will register much of a disappointment after the close, I think investors should log off for a while and wait until the shares move lower before deciding to buy.


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