VeriSign Inc. (VRSN) reported first-quarter 2013 earnings of 55 cents, which beat the Zacks Consensus Estimate by 6 cents per share. Earnings per share increased 34.1% year over year and 1.9% sequentially due to strong revenue growth and margin expansion.
Revenues
Revenues surged 14.9% year over year and 2.7% sequentially to $236.4 million, slightly ahead of the Zacks Consensus Estimate of $232.0 million. Approximately 60% of the total revenue was from the U.S, while the remaining came from overseas. U.S. revenues increased 13.0% year over year, while international revenues grew 18.0% from the year-ago quarter.
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% year over year 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 from the year-ago quarter.
VeriSign estimates renewal rate to be approximately 73.3% in the first quarter 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 the fourth quarter of 2012, renewal rate was 72.9%.
Margins
As a percentage of revenues, operating expenses declined to 43.6% in the first quarter compared with 51.9% in the year-ago quarter but increased from 41.2% in the previous quarter.
A sharp decline in sales & marketing (S&A), as well as general & administrative (G&A) expenses, down 580 basis points (“bps”) and 310 bps, respectively, drove the year-over-year decline. This offset a 50 bps upside in research & development (R&D) expense.
The sequential rise in operating expense as a percentage of revenues, was primarily due to 130 bps expansion in G&A and 70 bps upside R&D, which offset a 130 bps increase in S&A.
Operating margin improved to 59.6% in the quarter compared with 48.0% in the year-ago quarter and 59.0% in the previous quarter. Net income as percentage of revenues was 37.9% compared with 32.2% in the year-ago quarter and 40.9% in the previous quarter.
Balance Sheet & Cash Flow
Cash and cash equivalents (including marketable securities) remained flat at $1.56 billion in the quarter, out of which $240.0 million was held in the U.S.
VeriSign recently completed the issuance of 10-year $750.0 million senior unsecured notes. The company used the proceeds ($738.0 million) to pay off $100.0 million in debt. As of Apr 25, 2013, VeriSign had a total debt obligation of $2.0 billion, which includes the new $750.0 million debt issuance and $1.25 billion subordinated convertible debenture.
VeriSign’s debt to EBITDA ratio was 3.4X as of Mar 31, 2013, within its targeted range of 1.5X to 3.5X.
Operating cash flow was $150.6 million in the quarter, down from $171.0 million in the fourth quarter. Free cash flow was $145.0 million compared with $155.0 million in the previous quarter. VeriSign repurchased approximately 3.0 million shares for $132.0 million in the quarter.
Positive Guidance
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 second quarter of 2013.
For full year 2013, VeriSign forecasts revenues in the range of $945.0 to $960.0 million, which represents an annual growth rate of 8% to 10%. Non-GAAP gross margin is expected to be at least 80%, while operating margin is forecasted to be at least 57%.
Interest expense and non-operating income, net is expected to increase from $40.0–$42.0 million to $60.0–$62.0 million for fiscal 2013. 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 fiscal 2013.
Our Take
We believe that the renewal of the .com contract is a major positive for VeriSign going forward. Additionally, growing generic top-level domain (“gTLD”) customer base, international expansion through IDNs (internationalized domain names) and strong growth in the Network Intelligence and Availability (“NIA”) services will further boost revenues and profitability.
However, the persistent macroeconomic headwinds particularly in Europe, negative impact of search engine adjustments on domain monetization and increasing operating expenses related to the .com contract renewal remain the primary headwinds in the near term. Moreover, significant competition from AT&T Inc. (T), Verizon (VZ) and Infoblox Inc. (BLOX) in the NIA segment remains a major concern.
Although the recent debt issue improves liquidity, we believe that higher interest income will hurt profitability in the near term.
Currently, VeriSign has a Zacks Rank #3 (Hold).
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