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Leading domain name and internet security provider, VeriSign Inc. (VRSN - Free Report) reported better-than-expected second-quarter 2017 results, which also improved year over year.

The company reported adjusted earnings (excluding all one-time items but including stock-based compensation) of 99 cents a share, which beat the Zacks Consensus Estimate of 91 cents. Quarterly earnings also increased 13.8% from 87 cents reported in the year-ago quarter.

On a non-GAAP basis, the company posted earnings of $1.05 per share, up 15.4% from the year-ago quarter’s earnings of 91 cents. The increase was primarily driven by a benefit of 6 cents per share owing to a pre-tax gain from the divestiture of its iDefense business and lower share count.

Revenues marginally increased year over year to $288.6 million from $286.5 million and came ahead of the Zacks Consensus Estimate of $286.9 million as well. The year-over-year improvement was primarily driven by increase in domain name registrations in the U.S. as well as in international markets.

Shares of VeriSign have gained 34% year to date, slightly underperforming the 39.3% rally of the industry it belongs to.

Quarter Details

In the quarter, domain name registrations for .com and .net together grew 0.8% year over year to 144.3 million. In absolute terms, domain name registrations grew 0.68 million year over year. VeriSign processed 9.2 million new domain name registrations for .com and .net, an increase from 8.6 million processed in the year-ago quarter.

For the reported quarter, the exact renewal rate figures will be available after 45 days from Jun 30, 2017. The company estimates it to be 73.9% compared with 73.8% in the year-ago quarter. It provided renewal rate for the first quarter of 2017, which came in at 72.5% compared with 74.4% in the year-ago quarter.

Margins

VeriSign reported non-GAAP operating income of $188.3 million compared with $187.4 million in the prior-year quarter. The company’s non-GAAP operating margin was 65.3% in the quarter, down 10 basis points (bps) from the prior-year quarter.

Non-GAAP adjusted EBITDA was $203.5 million, up marginally from $202.8 million in the year-ago quarter.

VeriSign, Inc. Price, Consensus and EPS Surprise

VeriSign, Inc. Price, Consensus and EPS Surprise | VeriSign, Inc. Quote

Other Financial Details

Exiting the quarter, the company’s cash and cash equivalents (including marketable securities) were approximately $1.81 billion compared with $1.79 billion as of Mar 31, 2016.

Operating cash flow in the quarter was approximately $181 million while free cash flow came in at $171 million. Moreover, during the first half of 2017, the company generated $328.9 million of cash flow from operational activities.

VeriSign repurchased 1.7 million shares for $150.5 million in the quarter and 3.5 million shares for $300.5 million during the first half of 2017. As of Jun 30, 2017, the company had $770 million available under its current share repurchase program.

Guidance

Buoyed by the encouraging second-quarter results, VeriSign raised its full-year revenue and capital expenditure guidance. The company now expects revenues in the range of $1.155-$1.165 billion (mid-point $1.16 billion), up from the prior guidance of $1.145-$1.160 billion (mid-point $1.153 billion). The Zacks Consensus Estimate for 2017 revenues is $1.16 billion.

Capital expenditure is now anticipated to increase in the range of $40-$50 million compared with the previous guidance of $35-$45 million.

The company reaffirmed its earlier non-GAAP operating margin guidance range of 64.5% to 65.25%.

VeriSign also raised its domain name base growth rate guidance for 2017. The company now anticipates the same to grow between 2% and 2.75%, up from its earlier forecast of 1% to 2.5%.

Going ahead, for the third quarter, VeriSign projects domain name base registration to increase in the range of 0.8 million to 1.3 million.

Furthermore, the company announced a new agreement with ICANN under which the annual fee for a .net domain name registration will be increased from $8.20 to $9.02, effective Feb. 1, 2018. However, the other terms of the agreement remained unchanged.

Our Take

VeriSign holds a prime position in the highly regulated .com and .net domain industry. The renewal of the .com contract and price hikes for the .com and .net domain names will continue to drive VeriSign’s top line. Also, we believe that gTLD prospects, international expansion through IDNs and investments in intellectual properties will boost results. The company continues to benefit from strong demand in the U.S. as well as in the international markets.

Additionally, VeriSign has significant growth opportunities in the Distributed Denial of Service (DDoS) security market. VeriSign also has significant growth opportunities in the network security products space. Strong demand for VeriSign’s cyber security products, following ransomware attacks such as WannaCry and Petya is also a key growth driver. Also an increase in annual fee for a .net domain name registration will drive the company’s top-line results from next year onward.

However, the negative impact of search engine adjustments on domain monetization and increasing operating expenses related to sales and marketing remain primary headwinds.

Zacks Rank & Stocks to Consider

VeriSign carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Better-ranked stocks in the broader technology sector includeSBA Communications (SBAC - Free Report) , Applied Optoelectronics (AAOI - Free Report) and IPG Photonics (IPGP - Free Report) . While SBA Communications and Applied Optoelectronics sport a Zacks Rank #1, IPG Photonics has a Zacks Rank #2 (Buy).

Long-term earnings growth rates for SBA Communications, Applied Optoelectronics and IPG Photonics are projected to be 10.60%, 18.75% and 19.67%, respectively.

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