VeriSign Gets Approval, Shares Fall (TCX) (VRSN)

VeriSign, Inc. (VRSN) recently announced that the U.S. Department of Commerce has approved the renewal of VeriSign's agreement with the Internet Corporation for Assigned Names and Numbers (ICANN) to serve as the authoritative registry operator for the .com registry. The term of this agreement, effective from December 1, 2012, would continue through November 30, 2018.

Under the Cooperative Agreement between the Department of Commerce and VeriSign, the latter submitted its agreement on June 26, 2012 with ICANN with a proposal for renewal of the contract to serve as the authoritative registry operator for the .com.

The Commerce Department, which was conducting a review of the agreement, concluded that the agreement is in the public interest under Amendment 30 of the Cooperative Agreement.

However, the agreement includes certain new terms and conditions. VeriSign's current pricing of $7.85 per domain name registration will continue for the six-year term of the agreement. It also mentions that VeriSign is now no longer entitled to four price escalations of up to 7% during the six year period.

The price increase has now been limited to circumstances relating to imposition of new Consensus Policy or extraordinary expenses that emanate from security or stability threats; and thus it will require prior approval of Commerce Department prior approval.

However, pricing restrictions might be removed entirely if only VeriSign can convince the Commerce Department sufficiently that market conditions no longer warrant such restrictions.

The price increase constraint in the contract led to an almost 14% decline in the stock price after hours trading to close at $34.15.

Competition continues to be stiff for VeriSign from the likes of Tucows Inc. (TCX) and others. Estimates have been more or less static in the few days for Tocows as the company reported third quarter results which beat estimates by a penny. Revenues surged 12% with broad based performance across the portfolio.

Hence, we maintain our Neutral recommendation as we believe that most of the positives are already discounted at current levels and the current environment demands caution from the investors.

Our Neutral recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold.