VRSN Warrants Some Skepticism

Verisign, Inc. (VRSN - Analyst Report) reported $303 million in revenues during Q2, up 17.1% y/y but down 14.4% q/q. Revenues from core business (Domain Names, SSL Certificates, and Identity and Authentication Services (IAS), came in at $233 million. GAAP EPS came in at ($0.35) for the quarter. Pro-forma EPS of $0.25 exceeded our estimate by $0.03.

Core business generated a non-GAAP operating margin of 34.2%, up from 30.3% registered in Q1 2008. Growth in the naming business slowed down. The management provided Q3 revenue guidance of $236-241 million. They remain confident of exiting 2008 with an operating margin of 35%.

VeriSign is trading at 31.7 times our reduced 2008 earnings estimate of $0.98 per share. 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.

We maintain our Hold recommendation with a reduced target price of $35. This is derived by applying a target P/E multiple of 34.7x to our 2008 EPS estimate, which we think is justified given the company's current consolidation process.

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