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VeriSign (VRSN) Beats on Q3 Earnings, Raises '17 Revenue View

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VeriSign Inc. (VRSN - Free Report) reported better-than-expected third-quarter 2017 results, which also improved year over year.

On a non-GAAP basis, the company posted earnings of $1 per share, up 7.5% from the year-ago quarter. Earnings beat the Zack Consensus Estimate of 98 cents.

Revenues increased 1.7% year over year to $292.4 million and came slightly ahead of the Zacks Consensus Estimate of $291.8 million. The year-over-year improvement was primarily driven by an increase in domain name registrations in the United States as well as in international markets.

Shares of VeriSign have gained 43.5% year to date, significantly outperforming the 25.5% rally of the industry it belongs to.

Quarter Details

In the quarter, domain name registrations for .com and .net together grew 1.2% year over year to 145.8 million. In absolute terms, domain name registrations grew 1.47 million year over year. VeriSign processed 8.9 million new domain name registrations for .com and .net, an increase from 8.63 million processed in the year-ago quarter.

Per management, during the quarter, 59% of the revenues came from U.S. customers while international customers contributed the rest.

For the reported quarter, the exact renewal rate figures will be available after 45 days from Sep 30, 2017. The company estimates it to be 74.3% compared with 73% in the year-ago quarter. It provided renewal rate for the second quarter of 2017, which came in at 74% compared with 73.8% in the year-ago quarter.

Margins

VeriSign reported non-GAAP operating income of $195.2 million compared with $187.6 million in the prior-year quarter. The company’s non-GAAP operating margin was 66.7% in the quarter, up 140 basis points (bps) from the prior-year quarter.

Non-GAAP adjusted EBITDA was $214.1 million, up 4.6% from the year-ago quarter.

Other Financial Details

Exiting the quarter, the company’s cash and cash equivalents (including marketable securities) were approximately $2.4 billion compared with $1.81 billion as of Jun 30, 2017.

Operating cash flow in the quarter was approximately $175 million while free cash flow came in at $153 million. Moreover, in the first nine months of 2017, the company generated $503.6 million of cash flow from operational activities.

VeriSign repurchased 1.5 million shares for $147 million in the quarter. As of Sep 30, 2017, the company had $622 million available under its current share repurchase program.

Guidance

VeriSign raised its full-year guidance. The company now expects revenues in the range of $1.161-$1.166 billion, up from the prior guidance of $1.155-$1.165 billion. The Zacks Consensus Estimate for 2017 revenues is $1.16 billion.

The company increased its non-GAAP operating margin guidance range to 65%-65.5% from the earlier guidance of 64.5%-65.25%.

Capital expenditure is now anticipated to increase in the range of $45-$55 million compared with the previous guidance of $40-$50 million.

Management expects an increase in operating expenses related to sales and marketing in the fourth quarter.

VeriSign also raised its domain name base growth rate guidance for 2017. The company now anticipates the same to grow between 2.8% and 3.1%, up from its earlier forecast of 2% to 2.75%.

Going ahead, for the fourth quarter, VeriSign projects domain name base registration to increase in the range of 0.4 million to 0.9 million.

Our Take

VeriSign holds a prime position in the highly regulated .com and .net domain industry. The company continues to benefit from strong demand for domain name registrations in the United States as well as in international markets.

Rise in bitcoin and cryptocurrency trading is also contributing to an increase in domain name registrations, which is a tailwind for the company. Furthermore, the 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, will drive the company’s top-line going ahead.

Moreover, VeriSign’s focus to utilize its robust cash flows to return value to investors through share buybacks is a positive.

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 a 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 include Activision Blizzard Inc (ATVI - Free Report) , Micron Technology Inc. (MU - Free Report) and IPG Photonics Corporation (IPGP - Free Report) , all sporting a Zacks Rank #1.

Long-term earnings growth rate for Activision, Micron and IPG Photonics is projected to be 13.6%, 10% and 19.7%, respectively.

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