Herb G was talking about the SWINE on monday.....
Getting to the Heart of the VeriSign Story
By Herb Greenberg
Senior Columnist
4/30/01 10:18 AM ET
Is VeriSign (VRSN:Nasdaq - news - boards) really worth $10 billion? Manny Asensio doesn't think so. The irascible short-seller, whose latest claim to fame is popping the Winstar (WCIIQ:OTC - news - boards) bubble, says VeriSign investors are ignoring the combination of slowing growth, competition and a new wrangle with the government -- all of which, he believes, either individually or combined, could make the keeper of Internet domain names the next big Internet casualty. "This'll be another one of those stocks that goes down 90%," he predicts, "and people will go back and wonder how it was being hyped with a [$10] billion market cap."
Asensio, of course, was saying similar stuff about Network Solutions before it was bought last June by VeriSign. At the time, he thought the government would rule against Network Solutions' getting a near-monopoly on the domain-name registry (maintaining the master directory of domain names) and registrar (registering new domain names) businesses. He was wrong, and Network Solutions' stock soared.
But this is different; government-related issues, this time, are only part of the story. And while he's not suggesting VeriSign will go the bankruptcy route of Winstar, Asensio (who relishes a good fight) compares it to the hobbled telecom company in the sense that VeriSign and most of its analysts are saying all is well in its world despite what appear to be deteriorating fundamentals. Consider that sequential growth in new registry names slipped to 8.5% last quarter from a rate of 56.1% in last year's first quarter. The story is much the same in the registrar biz, where new-name growth last quarter was just 2.6%, compared with 23.75% a year earlier.
The slowdown is also reflected in VeriSign's sequential revenue growth, which lurched ahead at 8% last quarter, down from growth of 28% in the first quarter of last year (assuming you include income from Network Solutions, which wasn't acquired until the end of the second quarter). That's not all: In its earnings press release, VeriSign touts revenue growth of 526% over a year ago and pro forma income of $48.6 million vs. $2.2 million a year ago -- an astounding 2,100% gain. (Pro forma excludes a number of items, including amortization of goodwill and an income tax benefit.)
Sounds impressive until you look closer: The gain is apples and oranges, because last year's earnings for VeriSign don't include Network Solutions, which VeriSign bought last June. Had Network Solutions' revenue and earnings been added to last year's results, the 526% gain would be more like 61%, and the earnings gain would've been more like 80% (assuming they're calculated using the same rules VeriSign applied to its earnings). Asensio makes a case that, doing the numbers crunching his way, they would've actually fallen. Either way, it's a far cry from a 2,000% gain.
Why not play it straighter? VeriSign CEO Stratton Sclavos says he was playing it straight based on purchase accounting rules. Besides, he says, if he had added Network Solutions to last year's results, "it would've created more confusion, not less."
What about the slowing growth? Sclavos doesn't disagree. "It's a lot more complicated than Manuel wants to discuss," he says. "It was an Internet bubble. We were clear that there were a bunch of speculative names (that would cease to exist). And we expected growth rates to change going forward."
So why think the company can continue to grow at rates that should warrant a $10 billion market cap? While domain-name growth may be slowing, he says average subscription terms for name registry are "increasing dramatically." Sclavos also says $542 million in deferred revenue will help the company, as will the leverage it'll get from the buildout of its "Internet infrastructure," which includes a network of servers and service centers. As those items are paid for, he says, operating margins should more than double from 12.8% to the high-20% or low-30% range over the next three years.
He also says the company, which also sells Internet-security products, is selling other new products to its customers. (Asensio says he can't find details on those products or detailed-enough accounting to give that part of VeriSign a thorough working over. To which Sclavos says, "All sell-side analysts think we're giving them the keys to the Kingdom." He adds, "If Manuel is having a hard time calculating it, maybe he needs a better calculator.")
Meanwhile, there's the matter of VeriSign's imminent deadline to spin off either its registry or registrar businesses as part of a deal Network Solutions struck a year and a half ago with the Internet Corporation for Assigned Names and Numbers, also known as ICANN, the agency responsible for overseeing Internet domain names. A few weeks ago VeriSign reached a new agreement with ICANN that presumably would nix the need for the split-up. The Commerce Department, which must approve the agreement, responded that "given the significant issues" involved, it would need a few weeks to review the situation. It then extended VeriSign's split-up deadline to May 31 from May 9. Sclavos is confident of Commerce Department approval because "they understand market realities" and the "deal on the table is a much better deal for the Internet as a whole."
No matter what the Commerce Department decides, Asensio says fundamentals are fundamentals, and VeriSign's growth -- even with the company intact -- isn't as great as it would have you believe. "All this talk and hype mean nothing," he says. "Growth has stagnated." To a short-seller like Asensio, that's like saying game over. |
