First Union Securities Covers VRSN
By: First Union Securities Inc.
1/26/01 7:33 AM
Source: News.com
Summary:
Key Points
VRSN reported a solid quarter with revenue of $197mm and fully-taxed EPS of $0.13. Results exceeeded our expectation of $190mm in revenue and EPS of $0.12.
The web server digital certificate business was strong with 85,000 web server certificates issued (up 13% q/q) despite fewer selling days in the quarter, and increasing ASPs due to higher mix of 128-bit certificates (33% of total certs).
Enterprise PKI was the stand-out in the quarter with over 200 new customers signed, over 2mm digital certificates under contract at year end (up 150% y/y), increasing deal sizes, and accelerating PKI deployments.
Net new domain name registrations were 1.9mm (vs. 2.2mm in Q3༼) and 4.3mm for the industry overall (vs. 5.1mm in Q3༼).
Without the contribution from multi-lingual registrations (800,000 in the quarter), growth in core registration volumes would have been even weaker. However, on a positive note, paid registration volumes (excluding free promotions and Namezero channel) were roughly flat q/q.
Cash flow from operations was only $50mm (lowest level all year) due to relatively weak growth in deferred revenue (up $17mm q/q to $508mm) and $44mm increase in A/R (up 52% q/q).
Stock likely to weak today given the lower than expected cash flow number and the rise in DSO (to 54 days). DSOs still low but has been trending up significantly in last two quarters.
Maintain 2-buy rating and $85-90 price target (based on DCF valuation) given company's strength and dominant position in PKI and digital certificate business.
Company Description
VeriSign is a leading provider of Internet-based trust services, including authentication, validation, and payment, used by websites, enterprises, and individuals. The company is also the leading vendor of domain name registration services.
Discussion
WEB SERVER DIGITAL CERTIFICATES
VRSN's web server digital certificate business posted strong growth with over 85,000 certificates issued (up 135% y/y). Although sequential unit growth slipped again to 13% (vs. 18% in Q3༼ and 25% in Q2༼), the company exceeded its total bookings goal for the quarter by several million dollars due to increasing mix of higher-priced 128-bit certificates ($895/yr.) versus 40-bit certs ($350/yr.). As a result, ASPs rose above $400 for the first time ever due to the favorable product mix shift.
In addition, the sequential unit growth in still respectable in light of the dotcom meltdown and fewer selling days in the Dec. quarter (because of Holidays). Another factor affecting VRSN's volumes is the market share gain recently scored by Entrust in the 40-bit certificate market this quarter. Entrust sold over 20,000 certificates versus VRSN's 57,000 in the 40-bit cert market due largely to more aggressive pricing (Entrust is priced roughly $100 less per cert than VRSN). However, Entrust does not offer the more secure 128-bit certificates, and so does not compete with VRSN in the more lucrative high-end of the market.
VRSN now has issued over 485,000 web server digital certificates since its inception, with 275,000 now in active use at over 120,000 unique customers. Average revenue per customer now approximates roughly $1,000 per year.
ENTERPRISE PKI
The company's enterprise PKI business posted another exceptional quarter with over 200 new customers signed, increasing deal sizes, and an expanding sales pipeline. Total enterprise digital certificates under contract increased 150% y/y to 2 million, with over 600,000 certificates currently issued and actively in use by customers. Other operating metrics suggest that customers are starting to make larger financial commitments to their PKI deployments. For instance, management indicated that contract values on new customer deals increased 40% y/y and that contract values are up 50%-100% for follow-on orders from some of their largest customers.
In addition, the company is not experiencing any sales slowdown with enterprise PKI as the pipeline appears to be twice as large as one year ago. Moreover, sales cycles are shortening somewhat as customers are starting to commit to larger deployments. VRSN is not seeing any change in the competitive environment vis a vis Entrust or Baltimore, and in fact, believes that competition has lessened somewhat in the enterprise PKI sector.
DOMAIN NAME BUSINESS
Net new domain name registrations were 1.9mm (vs. 2.2mm in Q3༼) and 4.3mm for the industry overall (vs. 5.1mm in Q3༼).
We estimate that roughly 14%, or 250,000 of these registrations came through Namezero. In addition, roughly 200,000 of these registrations were domain name transfers and 150,000 were acquired from a defunct registrar. In addition, without the contribution from multi-lingual registrations (800,000 in the quarter), growth in core registration volumes would have been even weaker. Roughly 180,000 of the multilingual registrations went through the NSI registrar. However, on a positive note, paid registration volumes (excluding free promotions and Namezero channel) were roughly flat q/q as the chart below indicates. Moreover, free promotional registrations declined 75% sequentially.
Total renewals and extensions at the NSI registrar were roughly 650,000, representing a relatively healthy renewal rate of roughly 72%. Total active domain names at the registrar were 15.1mm at the end of the quarter. Net new domain names for the Registry was 4.3mm, comprised of 1.9mm for the NSI registrar and 2.4mm for all other non-NSI registrars. At the end of Q4 2000, the number of cumulative registrations in the NSI Registry grew 17% sequentially to 28.2mm, including 15.1mm for the NSI registrar, representing 10% sequential growth.
In Q4 2000, the NSI registrar sold 19,000 Image Café subscription services, representing 100% sequential growth. There are now over 24,000 active Image Café users. In addition, the number of dot-com email boxes grew 50% q/q to over 300,000 active boxes under management.
Management indicated that the retail channel continues to be the largest channel for the company. In terms of pricing, the retail channel remains firm at roughly $35 per domain name. However, the wholesale channel is seeing some pricing pressure in Europe, and to a lesser extent in the U.S. Pricing in the wholesale market is roughly $17-18 per domain name.
BALANCE SHEET HIGHLIGHTS
Cash flow from operations was only $50mm (lowest level all year) due to relatively weak growth in deferred revenue (up $17mm q/q to $508mm) and $44mm increase in A/R (up 52% q/q). DSO increased to 54 days versus 40 days in Q3 2000. DSO is still low but has been trending up significantly in last two quarters. This is due in part to an increasing percentage revenue generated through international channels. Management expect DSO to be in the range of 50-65 days. Total cash balances now stand at over $1.2 billion.
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