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Domain registry services provider VeriSign (NASDAQ:VRSN) is scheduled to report its fiscal 2013 results on Thursday, February 06. The company is the sole registrar of the .com and .net domain names, with a registration base of approximately 126 million .com and .net domains, and commands a 48% market share in the 265 million domain registrations globally. Revenues for the company have increased at an annualized pace of 12% since 2009. In addition to expanding revenues, the company has been able to steadily expand its operating profit margin. VeriSign’s operating profit margin expanded from 26% in 2009 to 53% by 2012. This significant expansion was brought forth by the sale of its SSL certificate and authentication business to Symantec (NASDAQ:SYMC) in August 2010.

For the nine months so far, VeriSign reported revenues of about $715 million, up 11% compared to a similar period from 2012. In addition to strong top line growth, the company’s operating profit margins increased by approximately 6 percentage points compared to the January – September period from 2012. This increase in revenues and operating profits resulted in net income growth for the period. Earnings per share for the January – September period in 2012 and 2013 increased from $1.31 to $1.62.

We expect another quarter of strong top line growth from VeriSign in its Q4FY13 results. We expect revenues to grow about 7.5% on a year-on-year basis to reach $248 million for the quarter, towards the higher end of the company’s guidance of $245-$250 million. We expect the company to post an earnings per share figure of $0.78 for Q4FY13.

Internationalized Domain Names, Generic Top-level Domain Names Should See Stronger Growth

Demand for Internationalized Domain Names (IDNs) of top-level domains such as .com and .net is increasing across the world due to increasing Internet penetration levels. Moreover, the demand for shorter urls with new domain names is increasing as businesses find it difficult to have a long and cumbersome .com url. Recently, ICANN delegated as many as 100 new Generic Top-Level Domain names (gTLDs) out of 1,410 applied domains to dilute the .com monopoly over the Internet. ICANN expects strong demand for these new gTLDs from small businesses that want freedom in choosing a unique url to depict their business, and wanting to have a higher page ranking from a search engine.

VeriSign applied for 14 new generic top-level domain names (gTLDs), which included 12 different transliterations of its .com and .net domain names, in addition to domain names .verisign and .comsec. They did so when ICANN began accepting applications during the first half of 2012. The company now provides IDNs across 32 different character sets that aim to provide a localized and multilingual platform for International businesses. Although the threat from other niche gTLDs is tepid at the moment, we could see a stronger growth in domains other than .com/.net in the future. Additionally, companies are choosing country code TLDs over traditional gTLDs due to their relaxed registration requirements. Last quarter, ccTLDs (i.e., Country-Code TLDs) posted a 14% growth in new registrations, compared to 5% growth in gTLDs. We expect this trend to strengthen going into 2014. Even if the adoption of new gTLDs does not impact VeriSign materially in the short term, a crowded .com/.net base should result in newer domains in the long term, leading to a decline in VeriSign’s domain registration market share.

Revenues From Patent Monetization In Focus

To further expand its top line growth rate, VeriSign stated its plans to monetize its Intellectual Property portfolio, including its patents and patent applications. The company has a total of 231 patents and other applications within the U.S., along with 304 such IP material across other countries globally. Although specifics about the company’s plans to monetize have not been disclosed, we expect the company to license its IP material and collect royalties. We expect to hear more details around the company’s monetization plans during its Q4 earnings call on February 06, 2014.

We will update our price estimate of $56 for VeriSign after the company files its financials with the SEC.

Source: VeriSign Pre-Earnings: Revenue Growth And Margin Expansion To Continue