Margins Improve, but Pricing Trends Worsen
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Results. VeriSign reported Q3 results with revenue and pro forma EPS of
$256.9 million and $0.33, as compared with consensus estimates of $258.8
million and $0.32. VeriSign reported September quarter operating margin of
38.6% (above consensus expectations of 38.2%), and although EPS also
exceeded estimates, the company benefited by approximately $0.01 from an
accounting change related to its convertible bond interest expense.
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Analysis. We view the downside to revenue as a result of relative weakness
in VeriSign Japan and the company’s authentication business, as well as a
decline in ASPs of VeriSign’s SSL certificates. Although the installed base of
SSL certificates increased by approximately 30,000, compared to our 25,000
estimate, AUR continued to decline to $234 (versus our estimate of $237)
from $241 in the prior quarter, due to a higher mix of lower-priced GeoTrust
certificates as well as increased pricing pressure from customers during
renewals. We have lowered our ASP assumption for 2009 and 2010 from
$239 and $225 to $237 and $222 to account for the continued pressure on
price points from these two dynamics. Domain name growth in the
September quarter equaled 1.4 million net additions, compared to our
estimate of 1.3 million and guidance of 0.9-1.2 million, reinforcing our belief
that 2009 will mark the cyclical bottom in terms of net additions to .com
and .net. However, management guided to an increase in net additions in
the December quarter of 1.2-1.5 million, versus our estimate of 1.5 million.
While some investors may be disappointed in this guidance, we view
management’s outlook as rather conservative, given that approximately 0.6
million domain names were added during the month of October.
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Estimates. Our 2009 revenue and EPS forecast is adjusted to $1.02 billion
and $1.30 from $1.03 billion and $1.28, respectively.
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Outlook. We are maintaining our Outperform rating and our price target of
$28.75, which implies a 2009 EV/UFCF multiple of 14.