VeriSign Inc. (VRSN), a global provider of domain name registry services, recently reported fourth-quarter and full year 2014 results. Quarterly earnings (excluding all one-time items but including stock-based compensation) of 63 cents per share increased 6.8% from 59 cents in the year-ago quarter on higher revenues and margin expansion.
Following the announcement on Feb 5, shares of the company have gained 6.4% so far.
Revenues
Revenues increased 4.2% year over year to $255.9 million, in line with the Zacks Consensus Estimate. For 2014, the company reported revenues of $1,010.1 million, an increase from $965.1 million reported in the past year.
In the quarter, VeriSign Registry Services added 0.59 million net new names. Domain names in the zone for .com and .net together increased 2.7% year over year in the reported quarter to 130.6 million.
VeriSign processed 8.2 million new domain name registrations for .com and .net, flat on a year over year basis.
VeriSign’s renewal rate for the third quarter was 72%, down 70 basis points (bps) year over year. Exact renewal rate figures will be available 45 days after the end of the quarter.
Margins
As a percentage of revenues, total operating expenses decreased to 44.4% in the quarter compared with 47% in the year-ago quarter.
On a year-over-year basis, sales & marketing (S&M) expenses decreased 90 basis points (bps), research & development (R&D) expenses decreased 40 bps, general and administrative expenses were down 80 bps, leading to a decline in operating expenses.
Operating income stood at $142.2 million, up 9.3% year over year. Operating margin was 55.6% in the reported quarter compared with 53% in the year-ago period. The expansion in operating margin was primarily due to lower operating expenses.
Other Financial Details
Exiting the year, the company’s cash and cash equivalents (including marketable securities) were $1.42 billion compared with $1.72 billion at the end of 2013.
Operating cash flow for the fourth quarter was $170 million, up from $147 million reported in the prior-year quarter. For 2014, operating cash flow was $600.9 million compared with $579.4 million in the prior year. Free cash flow in 2014 was $568 million compared with $514 million in 2013.
VeriSign repurchased approximately $209 million worth of shares in the fourth quarter and about $867 million worth of shares in 2014. Management has also approved another share repurchase authorization of about $453 million that takes the total amount remaining under the company’s share buyback program to $1 billion.
Guidance
VeriSign expects Domain Name Base addition for the first quarter of 2015 to range between 1 million to 1.5 million net names.
For 2015, VeriSign forecasts revenues in the range of $1.040 billion to $1.060 billion, which represents an annual growth rate of 3% to 5%.
Non-GAAP gross margin is expected to be at least 80%, while operating margin is forecast to be between 60% and 62%.
Interest expense and non-operating income, net is expected to be an expense within the range of $84 million and $90 million for 2015.
Capital expenditure is expected in the range of $40 to $50 million for the year.
Our Take
We believe the growing generic top-level domain (gTLD) customer base, international expansion through IDNs (internationalized domain names) and investments in developing new intellectual properties will boost revenues and profitability, going forward. Additionally, VeriSign has significant growth opportunities in its network security products.
However, the negative impact of search engine adjustments on domain monetization and increasing operating expenses related to marketing remain the primary headwinds in the near term.
Further, significant competition from AT&T Inc. (T), Verizon (VZ) and Akamai Technologies, Inc. (AKAM) in the NIA segment remains a major concern.
Currently, VeriSign has a Zacks Rank #3 (Hold).
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