a. VRSN is a serial acquisition company desperately trying to cover diminishing cash flow and eroding business. Goodwill on the balance sheet exploding to $1.3bn.
b. Income Statement misleading due to number of acquisitions. Revenue growth slowing and deferred revenue growth slowing suggesting past acquisitions have not been accretive.
c. Increase Payables masking a decline in cashflow. Level of payables at an unsustainable level (payables up 34% in past year Mar Q/Mar Q vs a 4% decline in top line sales).
d. Cashflow overstated due to substantial deferred revenues in 2005 which is slowing in 2006.
e. Buyback totally mitigated by huge dilution effect of past options grants - $96 million worth of options to be issues in next two years.
f. Earnings surprises are coming from one off items – in March Q 2006 the surprise came from other income.
g. Valuation not attractive – 24x p/e 2007 and 12x EBITDA.
h. Company is betting on becoming the enabler of mobile commerce for the network operators. VRSN wants to be the enabler for content - ringtones, music, video and billing. But competition is fierce – DOX, OPWV, INSP etc.
i. At the recent analyst day in May 2006, VRSN set itself a goal of gaining $30m in revenues from new business in the supply chain and publishing areas. In the next few years, they wanted to grow the $30m to over $100m. This suggests a continuation of an aggressive acquisition strategy despite management saying that acquisition rates would moderate.
Year End: Dec
Shares O/S: 249m
Market Cap: 5.4bn
Net Cash: 768m
EPS 2005: $0.82
EPS 2006: $0.79
EPS 2007: $0.90
P/E 2006: 27x
P/E 2007: 23x