Based in California, VeriSign Inc. (VRSN) is an internet infrastructure services provider, which includes domain name registry services and infrastructure assurance services, responsible for top-level domains such as .com, .net, .tv, .edu, .gov and .name among others. The company also provides Registry services and Network Intelligence and Availability (NIA) services. Working with the Internet Corporation for Assigned Names and Numbers (ICANN) and the U.S. Department of Commerce, the company can register exclusive domain names abiding these entities’ terms. The company’s relationships with these entities has been prospering full steam: ICANN approved the renewal of the agreement with VeriSign to serve as the authoritative registry operator for the .com registry, it got exclusive registry for the .tv and .cc country code top-level domains (ccTLDs), and has additionally started providing back-end systems for all .gov, .jobs and .edu domain names, as well as internationalized domain name (IDN) services that enable web-users to access websites in their local language.
The company’s revenues come from the fees charged for operating different domain names. Most domain names’ fees are charged as per agreement terms with ICANN; however, fees received for operating the .gov registry are based on the terms of agreement with the U.S. General Services Administration (GSA). As of September 2013, revenues of $125.9 million came from active domain names ending with .com and .net. Even though the company has presence all over the globe, the U.S. contributes 64.8% of revenues, while Europe, the Middle East and Africa (EMEA) contribute 15.5%, Australia, China, India and other Asia Pacific countries (APAC), 15.0%, and other countries such as Canada or Latin American countries, contribute 4.7%. Competition is increasing, especially with Latin script ccTLD registries and IDN ccTLD registries, as well as with other name service providers such as Neustar Inc. (NSR) or ARI Registry Services, and search engine providers such as Google Inc. (GOOG) Microsoft, Corp. (MSFT).
VeriSign’s position within the global Internet infrastructure industry is enviable, as it currently has a sanctioned monopoly position, with control of two of the most popular domain names in the world: .com and .net, and running of two Internet root servers. With more than 15 years of flawless service, the U.S. Department of Commerce and the ICANN have continuously renewed their contract with VeriSign to provide domain registry services. Nevertheless, the fact that this strong position is based on the company’s relationship with major regulating entities means it is subjected to its decisions and thus performs as essentially a regulated utility.
Yet, VeriSign has valuable intangible assets and has had an enviable performance over the last years. The company posted strong third-quarter 2013 results, with a growing generic top-level domain (gTLD) customer base, a global expansion through IDNs and a strong growth in the Network Intelligence and Availability (NIA) boosting revenues and profitability. Moreover, the firm has come to develop a profitable franchise system, with more than 50% share of the global top-level domains. The company is expected to continue its expansion within the network intelligence and new generic domains, as well as increasing their business profitability. Still, the popularity of .com and .net and he influx of new TLDs may come as a setback for the company, in addition to the concerning increase of competition in the NIA segment.
A Global Multi-Stakeholder Community?
It has been recently announced by the U.S. Commerce Department’s National Telecommunications and Information Administration (NTIA) their intention to transition key internet domain name functions to a “global mulsistakeholder community.” The main objective of this move seems to be the administration of root zone files and domain name systems, which, although it appears to keep unaffected VeriSign’s top-level domain businesses, is still something that brings about some uncertainty regarding the company’s future. Moreover, the company is in charge for some time of Internet Assigned Numbers Authority’s (IANA) administrative functions, duties which, if were to be lost, might lead to de development of some transactional friction. In addition, this transition might lead to divestment of ICANN’s responsibilities, and this could result in the loss of VeriSign’s right of renewal of its core domains: .com, .net, .gov, .cc, and other gTLDs. Nevertheless, the process of relinquishing control is expected to take time, and therefore keep the company’s results safe in the mid-term. Although these assumptions are yet to prove right, nevertheless, analysts think it is necessary to keep a close watch on this changing environment.
There’s no doubt VeriSign is a premium company, and the renewal of their .com and .net domain contracts is likely to keep boosting top-line growth. The increase on the fees has represented an important part of their revenue and, although the ICANN has settled a fixed fee for .com until Nov 2018, it can still raise the .net domain fee, and keep presenting a growth opportunity for VeriSign. Furthermore, the company is expected to introduce new gTLDs, expanding as well through IDNs.
Still VeriSign faces competition from other domain-level registration services companies, and the possibility of an increase in the domain name availability in the marketplace could make users change their preferences and affect the business. The ICANN agreement, which restricts the pricing for some domains, doesn’t apply to ccTLDs, but is still something that hinders the company’s growth expectations. As of their balance sheet, it is significantly leveraged, and as of Sep 30, 2013, the company 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. A higher interest rate on its debt might also affect profitability. Nevertheless, the company is committed on increasing shareholder value through share repurchases and dividends, and continues generating significant cash flow. VeriSign is a strong company, with high pricing power capable of handling the new terms of agreement with ICANN, and keeping its growth potentiality.
Disclosure: Damian Illia holds no position in any stocks mentioned.