VeriSign's News Corp. Deal Signifies Renewed Focus - But Big Challenges Remain

| About: VeriSign, Inc. (VRSN)

VeriSign's (NASDAQ:VRSN) decision to sell a majority stake in its Jamba! unit to News Corporation (NASDAQ:NWS) represents two fundamental shifts:

  • A move away from content in the mobile space to mobile infrastructure.
  • A more cautious directive from its Board to "harvest" more non-core acquisitions.

Looking at the first shift - VeriSign divides its Communications Services Group (52% of total revenue in Q2 2006 or $206M) into two categories:

1. Communications - connectivity, database and messaging ($120m in Q2 2006)
2. Commerce and Content - included Business to Consumer applications such as Jamba! and Jamster!, and Business to Business digital content services and mobile marketing. ($86m in Q2 2006)

The deal with News Corp. involves the mobile content part of the business (Jamba! and Jamster! was $74m in revenue out of a total mobile content revenue number of $86m in Q2 2006).

A greater question remains on the Communications part of the business, which has not shown significant growth despite acquisitions. In the Q2 Conference Call CEO Stratton Sclavos was asked a question about the lack of growth in the core communications business and the sequential decline that was expected in that segment in Q3. He responded:

"Its continued price pressure on data base services for some key carriers, especially now that they have got much more volume, as well as the loss of intercarrier traffic."

In my view, the deal with News Corp marks a shift for VeriSign, signifying they will not make further content acquisitions. Rather, they will spend time to fix up and possibly sell the communications part of the business where carrier consolidation makes growth difficult and pricing also tough. A change in the boardroom seems to have occurred -- the days of new niche acquisitions have past and a harvesting of assets and narrowing of vision has started.

Others see the company differently. Goldman Sachs analyst Sarah Friar in her note dated September 12 2006, posed her concern this way:

the company will now screen poorly on revenue growth for CY2007 after a similar impact in CY2006 when the payments business was sold. We [Goldman Sachs] estimate a revenue decline of about 8% in CY2007 versus 10% growth prior.

I have highlighted in the past, that my concerns have been that the flurry of acquisitions have not bought incremental cashflow to VRSN as one would expect with successful acquisitions. This is apparent in the following tables:

I remain concerned that the past acquisitions were not focused but rather designed to mask a slowing in the core communications group. The 10Q for June 2006 has not yet been filed due to the options issues which have arisen.

VeriSign faces NASDAQ delisting according to the last 8K filing (August 17 2006) for failure to file its 10Q.

Complications surround the option issue as one of the VeriSign Board members until his resignation on July 31 2006 was Gregory Reyes. In fact, Mr Reyes was a member of the Compensation Committee of the VRSN Board. Serious issues have arisen with Mr Reyes in his former capacity of CEO of Brocade.

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Disclosure: I, David Segelov, hold a short position in VRSN.