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

Read the full analyst report on VRSN