EUR 850.00 For Business Accounts Only

Morningstar | VeriSign Throws In Towel On Diversified Revenue Streams; Maintaining FVE

Continued execution at VeriSign allowed the firm to post another solid quarter, meeting our expectations as well as consensus on the top and bottom lines. The highlight of the quarter was the company’s announcement of a definitive agreement with Neustar to substantially sell off their entire security services business. The firm was never really able to gain traction with their DDoS prevention or DNS services, and we view the sale as prudent. Though terms of the deal were not disclosed, the business was not a significant contributor to VeriSign’s revenue or earnings, and we don’t anticipate that the transaction will have a material impact on our valuation.

We are maintaining our narrow moat rating for the domain registry, as well as our $89 per share fair value estimate. Even in the midst of a broad market sell-off, the shares continue to trade at an outlandish premium. At the time of writing, current levels have the stock at 30 times adjusted 2018 earnings. In our view, it stretches credulity that the firm will achieve the kind of growth and/or profitability implied by such a rich valuation, particularly given the fact that the success of their business model is tied to a regulatory entity.

Revenue came in at $306 million, representing a year-over-year increase of 4.6%. The firm continued its impressive streak of heightened profitability, with non-GAAP operating margins achieving a new zenith of 68.7%, versus the peak last quarter of 68.2% and last year’s margin of 66.7%. We do not view the margin expansion as sustainable, however, as management indicated that the new levels are more a function of delayed sales and marketing spending in some of their underpenetrated geographical regions.

Management did not provide details regarding negotiations with the NTIA surrounding the Co-operative Agreement. However, the current agreement expires at the end of November, and management intimated confidence that a new deal will be reached prior to that deadline.

In selling off the security services Business, management is planning to orient their long-term growth and operational success around core domain assets and infrastructure services and support. This signifies heightened risk in some respects, as the firm continues to be disproportionately exposed to regulatory whims of agencies such as ICANN and the U.S. Department of Commerce. Still, we maintain that the firm’s track record over multiple decades as a core contributor to Internet protocols and infrastructure puts them in good stead to renew contracts with these regulatory bodies and maintain registry exclusivity for the .com and .net generic top-level domains, or gTLDs. Further, our view has always been that it is incredibly difficult to engineer moats in the security business, given the intense competition and the speed with which new features become commoditized. The firm’s economic moat is predicated on their core business, and we are pleased that this will be the focus going forward.