Target Price for VeriSign Lowered

We are maintaining our Hold recommendation on the shares of VeriSign, Inc. (VRSN - Analyst Report). The company reported revenue of $223 million, up 23% y/y. Pro-forma EPS of $0.21 was $0.01 above consensus. Stronger-than-expected EBIT margins of 30.3% were mitigated by higher net interest expense (lower rates, less cash).

The management indicated that three non-core businesses have already been divested year-to-date, and the company remains on track to divest the remaining businesses by year-end. VeriSign's solid DNS and SSL Cert franchises should benefit from a few key drivers over the next few years. As the Internet spreads to mobile devices, we see VeriSign tapping this growth market with an array of value-added services.

Moreover, we believe the company has substantial growth opportunities in the areas of intelligent supply chains, real-time publishing, and interactive television. However, we are skeptical that the company, given its assertion that it will divest its remaining non-core businesses by year-end, will be able to follow through.

VRSN is now providing guidance for continuing operations only. Management provided Q2 revenue guidance of $228-233 million, up 3% compared to the first quarter. The revenue guidance is inclusive of its three core businesses: Domain Names, SSL Certs, and Identity and Authentication Services (IAS).

VeriSign is trading at 33.5 times our reduced 2008 earnings estimate of $0.98 per share. We have reduced our target price slightly to $36. This is derived by applying a target P/E multiple of 36.7x to our 2008 EPS estimate, which we think is justified given the company's current consolidation process.

Read the full analyst report on VRSN