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VeriSign, Inc. (VRSN - Analyst Report) posted a net income of 44 cents per share (excluding one-time items but including stock-based compensation expenses) in the third quarter of 2012, in line with the Zacks Consensus Estimate. 
 
On a reported basis, net income for the quarter came in at $78 million or 47 cents per share compared with a net income of $68.5 million or 43 cents per diluted share in the previous quarter and $59.0 million or 36 cents in the third quarter of 2011.
 
VeriSign generated revenues of $224 million in the third quarter of 2012, up 13% from the year-ago quarter and 4% sequentially. Approximately 60% of the total revenue was derived from domestic operations while the remaining 40% came from foreign operations. Revenue from the U.S. business was up 12.7% year over year while the same from international sources grew 14.7% year over year. 
 
The base of registered names for .com and .net totaled 119.9 million active domain names, up 7.1% year over year and 1.0% sequentially from 118.5 million names. The base of registered names in .com stood at 105 million names, while .net totaled 14.9 million names.
 
The company added 1.37 million net new domain names in the quarter. The company also processed 7.8 million new domain name registrations, an increase of 1.1% year over year.
 
The net new names added by VeriSign were below management’s expectations of 1.6 million –1.9 million names. This was primarily due to continued changes in search algorithms and weak economic environment in Europe. 
 
In 2010, VeriSign sold the Authentication Services business and closed down the operations of non-core Content Portal Services (CPS).
 
The continuing operations of the company consist primarily of the results of the Naming Services business, which comprises Registry Services and Network Intelligence and Availability (NIA) Services. NIA Services include the Managed Domain Name System (Managed DNS), iDefense and Distributed Denial of Service (DDoS) mitigation businesses.
 
Operating margin came in at 56.5% versus 54.0% in the second quarter of 2012 and 50.1% in the third quarter of 2011.
 
VeriSign generated $122 million of cash from operating activities in the third quarter of 2012, down from $135 million in the second quarter but up from $108 million in the year-ago quarter. 
 
VeriSign incurred $14 million in capital expenditures in the third quarter and repurchased 1.7 million shares for $77 million. VeriSign still has $610 remaining under its current share repurchase authorization.
 
VeriSign ended the quarter with $270.5 million in cash and equivalents, down from $1.44 billion at the end of the prior quarter. Deferred revenues came in at $809 million, an increase of $5 million from the previous quarter.
 
Guidance
 
On June 23, 2012, the Internet Corporation for Assigned Names and Numbers (ICANN) approved the renewal of Verisign's agreement to serve as the authoritative registry operator for the .com registry. The term period for the agreement will start from December 1, 2012 through November 30, 2018.
 
The terms of the agreement remains similar to the existing agreement, barring the new provisions regarding indemnification and audit rights, which is consistent with the other five largest generic top level domain (gTLD) registry agreements (including the .net agreement).
 
Meanwhile, under an agreement called the Cooperative Agreement, the U.S. Department of Commerce is currently reviewing the renewal of the .com registry agreement. VeriSign stated that the Commerce Department may not complete its review and approve the renewal of the .com Registry Agreement prior to its expiration on Nov. 30, 2012, and that the Commerce Department, together with the Department of Justice, is reviewing the .com Registry Agreement's pricing terms. 
 
Going forward, management narrowed its revenue guidance and now expects revenues between $870 million and $875 million in 2012, compared with the previous guidance of $870 million – $880 million.  
 
Excluding one-time items and stock based compensation expenses, gross margin is still projected around 80%. VeriSign expects to exit the fourth quarter of 2012 with an operating margin of 55%.
 
Capital expenditure is projected between 6% – 7% of total revenue, down from the previous forecast of 6% – 8%. Management expects to add 0.9 million to 1.3 million net names in the fourth quarter. 
 
Meanwhile, competition continues to be stiff for VeriSign from the likes of Tucows Inc. (TCX) and others. 
 
We maintain a Neutral recommendation on VeriSign. Our recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold. 
 
The weak guidance disappointed investors as the shares lost 13.56% in after-market trading to close at $40.28. In regular trading, shares lost 0.19% to close at $46.60.

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