VeriSign: A Many-Headed Hydra (VRSN)

VeriSign Inc (NASD:VRSN) is probably most well-known as the company that registers internet domain names. But, it now has a telecommunications business that helps route calls. It has an internet security business to provide prophylactic solutions for online commerce transactions, both billing and payment. It also owns a mobile music and ring-tone business called Jamba.

According to the company's website, it has twenty-six discrete product and service categories. By the way, VeriSign is also "building next-generation service offerings for emerging opportunities such as RFID-enabled supply chains, VoIP technology, and digital-content distribution over mobile and broadband networks".

The company continues to add to its lines of business by buying companies like Kontiki, a provider of broadband content services, and 3United, a wireless applications company.

Wall Street seems to think this is all a bit much.

The evidence is that the mix of all these businesses may not be working.

Revenue for Q1 06 ending March 31 dropped to $373.6 million from $387.3 million a year ago. Income from continuing operations fell to $12.1 million from $55.4 million in Q1 05. The company guided for revenue in Q2 to be $380 to $385 million. Revenue in Q2 05 was $444.8 million. Operating income for that quarter was $62 million. So, the company is unlikely to match last year's Q2 numbers.

One of the company's critical problems is that while its internet services business which provides registry and security products is growing, the communications services part of the business which handles wireless and wireline businesses is shrinking. In Q1 06, internet services revenue rose to $176.6 million from $145.4 million the previous year. Communications services revenue dropped from $241.9 million to $197.0 million. And, it gets worse. Gross margins in the internet services part of VeriSign held at 78% in the first quarter, the same as the year before. Communication services margins dropped from 66% last year to 54% in Q1 06.

The company's telecom businesses are doing poorly.

As one would expect, none of this is lost on the stock market. The company trades at $22.96, near its 52-week low of $19.01 and well down from the high of $33.36.

Most of the analysts who cover VeriSign have no appetite for the complexity of the business and the falling revenue. Most of the ratings initiated or changed this year are "market perform", "hold", or "sell".

It is not hard to imagine VeriSign trading below $20 if the current quarter is anything other than above expectations.

VRSN 1-yr Chart

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine. He is also the former president of Switchboard.com, which was the 10th most visited site in the world at the time, according to MediaMetrix. He has been chief executive of FutureSource LLC and On2 Technologies, Inc. and has served on the boards of TheStreet.com and Edgar Online. He does not own securities in companies he writes about. He can be reached at [e-mail].