Will the NTIA's Decision Hurt VeriSign?

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The U.S. government’s plan of relinquishing control of the system for assigning website addresses is expected to hurt VeriSign’s (VRSN) growth prospects going forward.

The National Telecommunications and Information Administration (:NTIA) intend to transfer key domain name functions to the global multi-stakeholder community. As a first step, it has asked the Internet Corporation for Assigned Names and Numbers (:ICANN) to bring together all global stakeholders to develop a proposal for the transition.

VeriSign, which operates the infrastructure for the .com, .net and.gov, stated that the NTIA decision will not affect its operations in any way as its Internet functions are much different from those included in the announcement.

Further, the company clarified that functions performed by VeriSign that come under the purview of the NTIA announcement have been performed as a community service spanning three decades without compensation and hence their non-renewal will not affect profitability going forward.

Nevertheless, this announcement seems to be a major setback for VeriSign. It is likely to be an overhang on the registration business, which is a major contributor of revenues (contributed nearly $1.0 billion revenue in 2013).  We believe that the less U.S. control will increase risk for VeriSign as it will reduce company’s ability to renew .com and .net contract price as per its own terms.  

Nevertheless, the whole process of relinquishing control will take some-time. Hence, we believe that it will have no significant negative impact on VeriSign’s near term results.

We believe that increasing domain name registration, the renewal of the .com contract and the price hike in .net domain name will boost VeriSign’s top-line in the near term. Additionally, VeriSign has significant growth opportunities from its network security products as Distributed Denial of Service (DDoS) attacks continue to grow.

However, the negative impact of search engine adjustments on domain monetization and increasing operating expenses related to the .com contract renewal remain the primary headwinds in the near term. Moreover, significant competition from AT&T Inc. (T), Qihoo (QIHU) and Verizon (VZ) in the network intelligence and availability (:NIA) segment remains a major concern.

Currently, Verisign has a Zacks Rank # 2 (Buy).

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