Earnings Preview: VeriSign, Inc.


We continue to maintain a Neutral recommendation on VeriSign, Inc (VRSN) ahead of its third quarter results, expected on October 25, 2012. 
VeriSign provides essential Internet infrastructure services to companies, service providers and website owners. VeriSign’s registry, security and communications services are essential for the smooth functioning of the online world.
Concurrent with the second quarter results, VeriSign narrowed its guidance for full year 2012. Management now expects revenues between $870 million and $880 million in 2012, up 13% to 14% year over year and higher than the previous guidance of $870 million – $890 million.  
Excluding one-time items and stock-based compensation expense, gross margin is projected around 80%. VeriSign expects to exit the fourth quarter of 2012 with an operating margin of 52%–54%.
The current Zacks Consensus Estimate for the third quarter is 45 cents. Management expects to add net names between 1.6 million and 1.9 million in the third quarter. Earnings estimates have been more or less static in the last few days. 
In July, VeriSign reported a net income of 41 cents per share (excluding one-time items but including stock-based compensation expenses) in the second quarter of 2012, missing the Zacks Consensus Estimate of 42 cents per share. 
The company now has just one reportable segment – Naming Services. This segment consists of Registry Services and Network Intelligence and Availability (:NIA) Services. VeriSign reported revenue of $214 million in the second quarter of 2012, up 13% from the year-ago quarter and 4% sequentially. The company added 1.81 million net new domain names in the quarter. 
The increase in margin guidance continues to be a strong positive even though addition of net names continues to be weak. Meanwhile, competition continues to be stiff for VeriSign from the likes of Tucows Inc. (TCX) and others. 
We expect the company to report in line results for the third quarter. Our recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold. 
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