Reason for Report : 1Q13 Earnings Update s2
Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report: 1Q13 Earnings Update
Prev. Ed.: Apr 11, 2013; 4Q12 Earnings Update (broker material considered till Feb 2, 2013)
Brokers’ Recommendations: Neutral: 70.0% (7 analysts); Positive: 20.0% (2 analysts); Negative: 10.0% (1)
Prev. Ed: 7, 1, 1
Brokers’ Target Price: $46.83 (↑$2.43 from last edition; 6 analysts) Brokers’ Avg. Expected Return: 0.9%
*Note: Although dated Jul 12, 2013, share price and brokers’ material are as of May 3, 2013.
Note: A Flash update on 1Q13 earnings was done on Apr 29, 2013.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have accompanying spreadsheet models
Portfolio Manager Executive Summary
VeriSign Inc. (VRSN) is a leading provider of Internet infrastructure services. The company’s registry services operate an authoritative directory of .com, .net, .cc, .tv, and .name domain names and the back-end systems for .gov, .jobs and .edu domain names. The key factors for evaluating an investment strategy for VeriSign are as follows:
· Strong top-line growth in 2012 as revenues surged 13.0% y/y to $873.6 million. Operating income jumped 39% y/y to $457.3 million due to lower expenses.
· The U.S. Department of Commerce (DOC) approved VeriSign’s renewal agreement with the Internet Corporation for Assigned Names and Numbers (ICANN) to serve as the authoritative operator for the .com registry for the term that commenced on Dec 1, 2012 through Nov 30, 2018. The .com and .net registry contributed approximately 80% of the total revenue growth in 2012
· ICANN sanctioned the biggest-ever expansion to the global DNS domain name system, by allowing the creation of new generic Top Level Domains (gTLDs) like “.disney” or “.london.” VeriSign has applied for 14 new gTLDs and approximately 220 applicants have chosen the company to provide backend registry services if their new gTLD application is approved.
· The company continues to pay back excess cash to shareholders. As of Dec. 31, 2012, VeriSign spent $314.6 million on share repurchase and has $975.5 million remaining under the 2012 buyback program.
Analysts’ Opinion: Of the 10 analysts in the Digest Group covering the stock, 20.0% provided positive ratings, 70.0% assigned neutral ratings, and 10.0% conferred negative ratings on the stock. Target prices range from $34.00 to $56.00 per share, with an average of $46.83. The average expected return on the current share price is 0.9%.
Neutral – (Equivalent ratings: Neutral and Perform) – 7 analysts or 70.0% – The analysts expect VeriSign to benefit from the ICANN contract renewal and the additional 220 domain names under management. However, there is a risk that the company may be forced to make concessions either in the rate of price increases or in pricing upon renewal. In addition, these analysts believe that although the gTLD proposition appears impressive, it will start reaping benefits for the company not before the latter half of 2013 or early 2014. These analysts remain cautious due to the declining number of domain name additions in 2012.
Bullish – (Equivalent ratings: Buy, Outperform, and Overweigh) – 2 analysts or 20.0% –The analyst believes that VeriSign will continue to benefit from a highly visible revenue model and despite modestly slower net name additions, continued operational discipline will drive further margin leverage. The analyst also believes that the new gTLDs will supplement growth over the longer term.
Bearish – (Equivalent ratings: Negative and Underperform) – 1 analyst or 10.0%
Jul 12, 2013
Overview
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative ArgumentsContract Renewal – In Nov 2012, the U.S. DOC approved VeriSign’s renewal agreement with the ICANN to serve as the authoritative operator for the .com registry for the term that commenced on Dec 1, 2012 through Nov 30, 2018.
Restructuring – VeriSign divested a number of non-core businesses as part of its restructuring activity, which will allow it to focus on providing highly scaleable, reliable and secure Internet infrastructure services.
Share Buyback – The company has been actively repurchasing shares. The recent debt offering ($600.0 million) will improve its leverage, which will help the company accelerate buybacks. This, in turn, should drive the bottom line.
Cost reduction - The divestiture of assets and consolidation of offices have led to a significant reduction in costs. This, in turn, should boost margins.
Price acceleration- The price hike for .net registry in Jan 2012, followed by the announcement (Dec 2012) of a hike in July will drive top-line growth. The company also increased .com prices in Jan 2012. / Decline in domain name growth and retention rate- Lower retention and domain name growth rate, particularly due to search engine algorithm adjustment from Google, may result in lower monetization, going forward.
Declining growth in mature markets – Mature markets, such as the U.S., are expected to see decreasing incremental growths. Moreover, volatile macro condition in Europe remains a primary concern.
Competition – The company faces competition from the forthcoming Internationalized Domain Name TLDs (IDN TLDs) and new gTLDs, pending approval of ICANN.
Restrictions by ICANN- VeriSign’s contract with ICANN imposes restrictions on the operation of .com and .net domains on pricing, bundling and use of registrars. As .com and .net forms the major portion of revenues, this restriction may hurt the top line. Generally, ICANN and DOC take a fair bit of time to approve any price hike.
Based in Reston, Calif., VeriSign Inc. (VRSN) provides Internet infrastructure services that include domain name registry services and infrastructure assurance services. Through its only reportable segment Naming Services, the company operates the authoritative directory of .com, .net, .cc, .tv, and .name domain names and the back-end systems for all .gov, .jobs and .edu domain names. The company also provides Network Intelligence and Availability (NIA) services. NIA provides infrastructure assurance services to organizations and also offers iDefense, Managed Domain Name System and Distributed Denial of Service protection Services.
For more information about the company, please visit its website at www.verisigninc.com.
Note: VeriSign’s Fiscal Year ends on Dec 31
Jul 12, 2013
Long-Term Growth
VeriSign’s EPS is projected to grow at approximately 12.3% over the next five years. VeriSign intends to focus more on developing new revenue streams in 2013. Analysts believe that the new gTLD's will supplement growth over long term.
Analysts believe that the renewal of the .com contract is a major positive for VeriSign. Moreover, the price hike in .net domain name will boost its top-line growth. Additionally, international expansion through IDNs (internationalized domain names) and strong growth in the NIA services will further boost revenues and profitability over the long term.
The recent debt offering ($600.0 million) is expected to improve the company’s leverage over the long term. The company has consistently returned excess cash to shareholders in recent years. Analysts believe that an overhauling of the company’s capital structure will enable Verisign to take additional steps to maximize shareholder value. In such a scenario, the improvement in leverage will help VeriSign to accelerate share repurchase over the long term.
Jul 12, 2013
Target Price/Valuation
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest
Rating DistributionNeutral / 70.0%↓
Positive / 20.0%↑
Negative / 10.0%↓
Maximum Target Price / $56.00↑
Minimum Target Price / $34.00
Avg. Target Price / $46.83↑
No. of brokers with Target Price/Total no. of brokers / 6/10
Risks to the target price include a slowdown in Internet growth, contract renewals and pricing, lower than expected margin expansion and/or a share buyback activity and regulatory risks related to VeriSign's operation of the .com and .net registry.
Recent Events
On Apr 25, 2013, VeriSign reported 1Q13 results. The highlights are as follows:
· Revenues increased 14.9% y/y to $236.4 million
· EPS jumped 38.1% y/y to $0.58
· VeriSign Registry Services added 1.99 million net new names in the quarter
Revenues
According to the company press release, 1Q13 revenues increased 14.9% y/y and 2.7% q/q to $236.4 million. Approximately 60.0% of the total revenue was from the U.S, while the remaining came from overseas. The U.S. revenues increased 13.0% y/y, while international revenues grew 18.0% from the year-ago quarter.
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Total Revenues ($ in Million) / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2011A / 2012A / 2013E / 2014EZacks Consensus / $237.0 / $957.0↑ / $1,020.0↓
Digest Average / $205.7 / $230.2 / $236.4 / $237.4 / $772.0 / $873.6 / $956.0↑ / $1,015.7↓
Digest High / $205.7 / $230.2 / $236.4 / $239.9 / $772.0 / $873.6 / $961.2↑ / $1,026.0↓
Digest Low / $205.7 / $230.2 / $236.4 / $234.8 / $772.0 / $873.6 / $950.2↓ / $1,003.2↓
Y/Y Growth / 13.3% / 13.0% / 14.9% / 10.9% / 13.2% / 13.2% / 9.4%↑ / 6.2%↓
Q/Q Growth / 1.0% / 3.0% / 2.7% / 0.4%
VeriSign Registry Services added 1.99 million net new names compared with 1.25 million in the previous quarter. Active domain names in the zone for .com and .net increased 5.5% y/y to $123.1 million (.com 108.1 million and .net 15.0 million) in the quarter. VeriSign processed 8.8 million new domain name registrations for .com and .net, slightly down from 8.9 million in the year-ago quarter.
VeriSign estimates renewal rate to be approximately 73.3% in 1Q13 compared with 73.9% in the year-ago quarter. Exact renewal rate figures will be available post 45 days of the end of the quarter. In 4Q12, renewal rate was 72.9%.
Outlook
VeriSign intends to focus more on developing new revenue streams in 2013. The company expects to add 0.9 million to 1.3 million net new names in the .com and .net registry in 2Q13. For FY13, VeriSign forecasts revenues in the range of $945.0 million to $960.0 million, which represents an annual growth rate of 8.0% to 10.0%.
Analysts believe that VeriSign remains focused on developing new revenue streams by expanding the existing business through continued innovation as well as targeted marketing programs. This will help it to gain incremental growth in the .com and .net zone in the near term. Moreover, strong growth from the NIA segment and new domain opportunities are expected to boost top-line growth, going forward.
Please refer to the Digest spreadsheet on VRSN for more details on revenue estimates.
Margins
VeriSign reported gross profit of $189.2 million, which increased 15.0% y/y in 1Q13. Gross margin was 80.0% slightly better than 79.9% in 1Q12.
In 1Q13, non-GAAP operating income surged 31.8% y/y to $140.9 million. Operating margin was 59.6% in 1Q13, much better than 51.9% in 1Q12. Including stock based compensation, operating income came in at $133.3 million with margins of 56.4%.
Total costs and expenses decreased 3.4% y/y to $103.2 million. As a percentage of revenues, expenses declined to 43.6% in 1Q13 compared with 51.9% in 1Q12.
Non-GAAP net income increased 37.7% y/y to $94.2 million in 1Q13. Net margin came in at 39.8% in 1Q13 versus 33.3% in 1Q12. Including stock based compensation, net income came in at $89.6 million with margins of 37.9%.
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2011A / 2012A / 2013E / 2014EGross / 80.7% / 82.3% / 80.7% / 80.7% / 79.5% / 81.5% / 80.9%↓ / 81.7%↓
Operating / 51.9% / 62.0% / 59.6% / 57.4% / 49.7% / 56.2% / 58.2%↑ / 58.8%↑
Pre tax / 47.4% / 57.9% / 55.3% / 51.6% / 46.0% / 51.9% / 52.4%↓ / 52.6%↓
Net / 33.3% / 41.7% / 39.8% / 37.7% / 32.2% / 36.9% / 38.6%↑ / 38.4%↓
Outlook
For FY13, VeriSign expects non-GAAP gross margin to be at least 80.0%, while operating margin is forecasted to be at least 57.0%. Interest expense and non-operating income, net is expected to increase from $40.0 million – $42.0 million to $60.0 million – $62.0 million for FY13. The increase reflects additional expense from the new debt issuance. Capital expenditure is expected in the range of $60.0 million to $80.0 million for FY13.
According to the Zacks Digest model, gross margin is expected to decrease 60 basis points (bps) on a y/y basis in FY13 to 80.9% but is expected to increase by 80 bps y/y in FY14 to 81.7%. Operating margin is expected to increase 200 bps y/y in FY13 to 58.2% and 60 bps in FY14 to 58.8% on y/y basis.
Please refer to the Digest spreadsheet on VRSN for more details on margin estimates.
Earnings per Share
VeriSign reported non-GAAP EPS of $0.58, up 38.1% y/y in 1Q13. The better-than-expected result was primarily driven by strong revenue growth and margin expansion. Including stock based compensation, earnings came in at $0.55 per share.
Provided below is a summary of EPS as compiled by Zacks Research Digest:
EPS / 1Q12A / 4Q12A / 1Q13A / 2Q13E / 2011A / 2012A / 2013E / 2014EZacks Consensus / $0.53 / $2.13↑ / $2.43↑
Digest High / $0.42 / $0.59 / $0.58 / $0.57 / $1.52 / $1.97 / $2.35↓ / $2.75↑
Digest Low / $0.41 / $0.59 / $0.58 / $0.54 / $1.48 / $1.97 / $2.20↓ / $2.38↓
Digest Average / $0.42 / $0.59 / $0.58 / $0.55 / $1.49 / $1.97 / $2.27↓ / $2.55↓
Y/Y Growth / 31.0% / 46.8% / 38.7% / 22.5% / 43.6% / 31.9% / 15.4%↓ / 12.1%
Q/Q Growth / 4.2% / 17.9% / -1.6% / -5.0%
Highlights from the EPS table are as follows:
· 2Q13 forecasts (5 analysts in total) range from $0.54 to $0.57; the average being $0.55
· 2013 forecasts (5 analysts in total) range from $2.20 to $2.35; the average being $2.27
· 2014 forecasts (5 analysts in total) range from $2.38 to $2.75; the average being $2.55
Analysts believe that margin expansion due to lower operating expenses will boost EPS, going forward.
Please refer to the Digest spreadsheet on VRSN for more details on EPS estimates.