VeriSign Inc. (VRSN) reported fourth-quarter 2013 earnings of 59 cents per share, which beat the Zacks Consensus Estimate by a nickel. Earnings (minus stock-based compensation) increased 8.0% year over year and 7.0% on a sequential basis.
Revenues
Revenues surged 6.7% year over year and 0.8% sequentially to $245.6 million, slightly ahead of the Zacks Consensus Estimate of $245.0 million. Approximately 61.0% of the revenues were from the U.S., while the remaining came from overseas.
VeriSign Registry Services added 1.29 million net new names compared with 1.55 million in the previous quarter. Active domain names in the zone for .com and .net increased 5.0% year over year to $127.2 million (.com 112.0 million and .net 15.2 million) in the quarter.
VeriSign processed 8.2 million new domain name registrations for .com and .net, up from 8.0 million in the year-ago quarter but slightly down from 8.3 million in the previous quarter.
VeriSign estimates renewal rate to be approximately 72.2% in the fourth quarter, compared with 72.9% in the year-ago quarter. Exact renewal rate figures will be available 45 days after the end of the quarter. In the third quarter of 2013, renewal rate was 72.7%.
Margins
As a percentage of revenues, operating expenses soared to 47.0% in the fourth quarter compared with 41.2% in the year-ago quarter and 45.5% in the previous quarter.
A sharp increase in sales & marketing (S&M) as well as general & administrative (G&A) expenses, up 120 basis points (bps) and 360 bps, respectively, drove the year-over-year growth. Research & development (R&D) expense increased a modest 20 bps from the year-ago quarter.
The sequential rise in operating expense as a percentage of revenues was primarily due to a 50 bps expansion in G&A and an 80 bps upside in S&M.
Operating margin was 53.0% in the quarter compared with 58.8% in the year-ago quarter and 54.5% in the previous quarter. The contraction in operating margin was primarily due to higher operating expenses on year-over-year as well as quarter-over-quarter basis. Net income margin was 36.3% compared with 38.6% in the year-ago quarter and 34.7% in the previous quarter.
During the fourth quarter, Verisign liquidated for tax purposes one of its domestic subsidiaries which will allow it to claim a worthless stock deduction on its 2013 federal income tax return. The company recorded an income tax benefit of $375.3 million related to the worthless stock deduction, net of valuation allowances and accrual for uncertain tax positions in the quarter.
VeriSign sold certain cost method investments during the quarter and realized a pre-tax non-operating gain of $15.8 million.
The company also plans to repatriate approximately $700.0 to $800.0 million of offshore cash during the second or third quarter of 2014. During the quarter, the company recorded an income tax expense of approximately $167.0 million related to the taxable income generated in the U.S. as a result of the intended repatriation in 2014.
Balance Sheet & Cash Flow
Cash and cash equivalents (including marketable securities) were $1.72 billion (out of which $389.0 million was held in the U.S.) compared with $1.80 billion in the previous quarter.
Operating cash flow was $147.0 million in the quarter, up from $134.0 million in the third quarter. Free cash flow was $121.0 million compared with $134.0 million in the previous quarter.
VeriSign repurchased approximately 4.1 million shares for $225.0 million in the quarter. On Jan 31, 2014, the board of directors increased the share buyback program by approximately $528.0 million to a total of $1.0 billion.
Positive Guidance
VeriSign intends to focus more on developing new revenue streams in 2014. The company expects to add 1.0 to 1.5 million net new names in the .com and .net registry for the first quarter of 2014.
In 2014, VeriSign expects to pay cash taxes of approximately $35.0 to $50.0 million, due to repatriation.
For 2014, VeriSign forecasts revenues in the range of $1.0 to $1.02 billion, which represents an annual growth rate of 4.0% to 6.0%. Non-GAAP gross margin is expected to be at least 80%, while operating margin is forecast to be between 58.0% and 60.0%.
Interest expense and non-operating income, net is expected to be within the range of $73.0–$77.0 million for fiscal 2014. Capital expenditure is expected in the range of $60.0 to $80.0 million for fiscal 2014.
Our Take
We believe 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.
However, negative impact of search engine adjustments on domain monetization and increasing marketing expenses related to the introduction of new gTLDs and IDNs remain the primary headwinds in the near term. Moreover, higher cash income taxes due to repatriation will hurt profitability in the near term.
Additionally, significant competition from AT&T Inc. (T), Verizon (VZ) and Infoblox Inc. (BLOX) in the NIA segment remains a concern, going forward.
Currently, VeriSign has a Zacks Rank #3 (Hold).
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