Bill it seems like they'll approve it and notice what they say in this report if vrsn has to give up .org and .net
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Technology/Internet Infrastructure
STRONG BUY
LARGE CAP
USD 47.68
VeriSign, Inc. (VRSN)
Proposed Agreement with ICANN Positively "Resolves" Registrar Uncertainty.
Summary
· VeriSign announced a proposed agreement with ICANN that promises to allow them
to retain control of the DNS Registrar in return for a few minor conces-sions
including release of .org names by 2002 and a competitive bid for .net names in
2006.
· This agreement could be a very positive resolution of the uncertainty
sur-rounding the status of the customer-facing DNS registrar that has hung over
the stock for the past few months. Upselling customers through the DNS Reg-istar
could be key to VeriSign's long-term growth while the potential registra-tion
of .org and .net names are a tiny portion of growth prospects.
· We continue to believe that VeriSign can leverage its unique infrastructure to
upsell high margin services to their large customer base. Removing
uncer-tainty around the DNS Registrar, the most customer-facing portion of their
business, removes a potential obstacle to executing this strategy.
· Overall, we are not changing estimates given the long-term phase-in of the
proposed agreement, but we believe that it enhances what is already a very high
visibility business model. VeriSign currently trades at reasonable multi-ples
considering its long-term growth prospects of 6.5 times 2002 revenue, 46 times
2002 EPS and just over 23 times this year's free cash flow.
Price Mkt. Value 52-Week
03/01/011 Target Dividend Yield (Billions) Price Range
USD 47.68 $200 - - $9.1 $259-47
Annual Prev. Abs. Rel. Revenue EV/
EPS EPS P/E P/E (Millions) Revenue
12/02E $1.03 $1.03 46.3 - $1,410.0 6.5
12/01E 0.58 0.57 83.7 990.0 9.2
12/00A 0.36A 0.34E 474.8
March June September December FY End
2001E $0.13 $0.14 $0.15 $0.17 Dec. 31
2000A 0.02 0.08 0.11 0.13
1999A (0.02) (0.00) (0.01) (0.04)
ROIC -
Total Debt -
Book Value/Share (12/99) $1.35
WACC (3/00) 13.2%
Debt/Total Capital
Common Shares 213.5 mil.
1On 03/01/01 DJIA closed at 10,493 and Nasdaq at 2,126.
VeriSign, Inc. is a leading provider of digital certificate solutions and
e-commerce infrastructure needed by public and private enterprises and
individuals to conduct secure communications and commerce over Internet Protocol
(IP) networks. Its wholly owned subsidiary, Network Solutions, is the registry
of the largest domain names (e.g., .com, .net, .edu) and a leading provider of
registration services.
Investment Thesis
VeriSign announced a very positive proposed agreement with the
quasi-governmental Internet Corporation for Assigned Names and Numbers (ICANN)
that would allow them to retain control of the DNS Registrar instead of
proceeding with the spinoff as announced in January. In return, VeriSign
agreed to release control of the .org names in their Registry by 2002 and face a
competitive bid process on the .net names in January 2006. This agreement
would be a positive development in a saga that began in 1999 with scrutiny of
the Registry/Registrar monopoly then held by the former Network Solutions by
ICANN and the Depart-ment of Commerce. Since then, VeriSign has been operating
under an agree-ment mandating a "recompete" of all its TLD Registry monopolies
in 2003, unless the customer-facing DNS Registrar business was split off and
sold to different owners. The provisions of the proposed agreement announced
today has far more friendly provisions. However, the deal annoucned today will
not be final until ICANN completes its public forums and the DoC gives final
approval - a process that could take several weeks.
We view this agreement as a potentially very happy ending to the uncertainty
sur-rounding the the DNS Registrar which has hung over the stock for the past
few months. We believe that VeriSign gives up very little to get a lot in these
and in-vestors could be key benefactors. Overall, they stand to remove all the
risks of the proposed DNS Registrar spinoff in exchange for forgoing a small
annuity revenue stream from non-profits and a recompete on the .net names in 5
years.
Overall, we are not changing estimates given the long-term phase-in of the
pro-posed agreement, but we believe that it could enhance what is already a very
high visibility business model. To be sure, the weaker macro environment is a
concern for all stocks, but we remain confident in VeriSign's performance over
the course of 2001. VeriSign currently trades at 9.2 times 2001 revenue and
83.7 times 2001 EPS and forward multiples of 6.5 times revenue and 46.3 times
EPS. Although these valuations appear to be high, they are supported by
VeriSign's high near-term visibility, its strong cash flow and returns on
capital and huge competitive advantage based on its unique place in the internet
infrastructure. Our models suggest a long-term target price of $200.
Valuation
Although VeriSign's valuation appears to remain high by conventional metrics, we
believe the it is a compelling long-term buy for four key reasons. First,
VeriSign's deferred revenue model gives us a very high visibility on near-term
numbers. For example, over 80% of the their 4Q 2000 revenue was booked before
the quarter began. This makes the probabilty of a shortfall very low in the near
term - a qual-ity that is increasingly rare among high growth infrastructure
leaders. Secondly, we expect VeriSign to earn roughly $400 million in free cash
flow next year, re-flecting some growth in deferred revenues not captured in
operating income. This would imply a free cash flow multiple of roughly 22.7
times which appears more than reasonable. Thirdly, VeriSign's limited capital
needs and ability to upsell a full suite of value added services promises high
double digit ROIC and higher margins for 2001 and beyond. Finally, their unique
infrastructure - which would be reaffirmed by the agreement announced today -
represents a lofty bar-rier to entry. VeriSign's strong positioning is unique
even among infrastructure leaders.
Inside the Proposed Deal
The terms of the proposed deal are very favorable to VeriSign -- they give up a
little in the long-term to remove a considerable near-term uncertainty around
the DNS Registrar. For example, registration of .org and .net names represents
a tiny portion of long-term growth prospects ($6 per year per name x less than 7
million names) - and VeriSign may be able to win the .net names again in the
2006 competitive bid. Furthermore, there are no restrictions on VeriSign
provid-ing outsourced operational services to the potential bid winners on
current and future top-level domains (TLDs). VeriSign currently has such an
arrangement with the owners of the .tv TLD as well as the U.S. government.
We continue to believe that VeriSign's upside is in leveraging its unique
infra-structure to upsell high margin services to their large customer base.
Removing uncertainty around the DNS Registrar, which is the most customer
facing portion of their business, eliminates a key near-term obstacle to
executing this strategy.
VeriSign's Choice
The current agreement covering the .com, .net, and.org registries expires in
No-vember 2003, which until this agreement represented a hard deadline for in
which VeriSign had to make a choice :
Prior Option 1: Give up its unique registry monopolies provided by ICANN in
2003.
Key Risk: Losing their most dramatic competitive advantage in which they've
invested billions before getting the chance to monetize that advantage.
Prior Option 2 (which remains Plan B today): Legally spin off the DNS Registrar
and find some way to retain relationship with its millions of custom-ers
Key Risk: The possibility of being disintermediated from its most lucrative
opportunity - the ability to upsell value added services to its millions of
cus-tomers.
Today's Proposed Option:
What VeriSign Gives: VeriSign releases .org names from Registry by De-cember
2002, agrees to a competitive bid for the .net names in 2006 and re-affirms its
committments to invest adequately in directory infrastructure and provide access
to that infarstructure to accredited registrars.
What VeriSign Gets: To keep the DNS Registrar as well as a presumptive right to
renew the .com registry in 2007, effectively removing the risks from its
previous set of options.
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research
Americas
U.S./Technology/Internet Infrastructure
STRONG BUY
LARGE CAP
USD 47.68
VeriSign, Inc. (VRSN)
Proposed Agreement with ICANN Positively "Resolves" Registrar Uncertainty.
The company had announced on January 31 that it was moving towards Option 2 and
seeking a way to retain control of its customers while spinning off the DNS
Registrar - presumably to a friendly entity. We believe that VeriSign could
have been successful in this strategy - but there were undoubtedly risks. The
accep-tance of the new agreement would remove these risks which we believe have
been a significant overhang on the stock for the past few months.
Has ICANN Gone Mad?
Not at all, they are reacting to a much different competitive landscape than
that of 1999. We believe that ICANN has preliminarily expressed interest in
this new agreement because ICANN's goal of creating a competitive Registry and
Regis-trar marketplace is much closer today than in 1999. For example, there
are over 80 active registrar competitors today where there were none in 1999.
Further-more, ICANN has awarded additional TLDs such as .biz and .info to
registries other than VeriSign where then Network Solutions was the only option.
With many of the competitive issues addressed, we believe that ICANN's
overriding interest is in assuring a stable and reliable internet naming system,
which augurs well for VeriSign's prospects. Hence, a subtle change in ICANN's
posture is probably sustainable, but they will undoubtedly continue to monitor
the competi-tive landscape closely and respond to the public's needs.
Renewals Remain an Uncertainty
In our opinion the biggest issue, and potentially the biggest opportunity facing
VeriSign, is the fact that roughly 15 million domain names will come up for
re-newal over the next three quarters. Historically, VeriSign's renewal rates
have exceeded 75%, but the management team is setting expectations at a 50%
re-newal rate for these 15 million names. If the renewal rate runs higher or
lower than this, the implications for the income statement are significant. So
far renew-als are running ahead of plan and managment exudes confidence about
their prospects for the final weeks of the quarter. On the other hand, March
and April of 2000 saw the greatest increase in the registering of speculative
names so its stands to reason that there will be heightened risk of nonrenewal
as these annual contracts expire in the coming weeks.
N.B.: CREDIT SUISSE FIRST BOSTON CORPORATION may have, within the last three
years, served as a manager or co-manager of a public offering of securities for
or makes a primary market in issues of any or all of the companies mentioned.
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CORPORATION
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Copyright © CREDIT SUISSE FIRST BOSTON, and its subsidiaries and affiliates,
2001. All rights reserved.
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= = VeriSign, Inc. = = VRSN: STRONG BUY
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