Sell-Side Reaction to VeriSign Pre-Announcement (VRSN)

| About: VeriSign, Inc. (VRSN)

AmTech Research analyst Dave Edwards sent a note to clients reacting to VeriSign's pre-announcement. Quotes from the note:

VRSN: Jamba/Jamster Plays a Sour Note

Yesterday, VeriSign pre-announced Q3 results. Due to a significant miss in the Jamba/Jamster business, VeriSign's revenue will be $410M while EPS will meet previous guidance of $0.27 due to intra-quarter expense cuts. For Q4, VeriSign's preliminary guidance is $395-$400M in revenue with EPS of $026-$0.27.

Jamba/Jamster revenue was impacted by seasonality, lack of hit content and new advertising guidelines and restrictions. While we had anticipated that these issues would be a risk for Q3 revenue, we are surprised by the magnitude of the impact. We initially discussed the problems for growth stemming from regulatory changes in Europe on 7/21/05, but did not sense the churn problems would remain so stubborn in the face of pro-active churn reduction efforts by VeriSign. At this point, it seems that the success of the content business is somewhat out of management's control. Restrictions from carriers and regulators increased churn while the lack of a new hit (i.e. Crazy Frog 2) and seasonality dampened the overall business.

Longer term, we remained concerned about competition, margin pressures and lack of progress in signing new partners. Because Verizon (VZ, $32.53, Buy/A. Lin) has been the most conservative in adopting off-portal partners, we believe there will not be a Jamba/Jamster launch until the lawsuit in November gives some indication on how Jamster/Jamba may be seen from a reputation standpoint. Verizon is also used to Qualcomm's (QCOM, $44.99, Buy/A. Lin) BREW platform for content, which typically has a long QA and approval process controlled by the carrier. Thus, a major content aggregator like Jamba may take longer to commercialize on VZ even if there is a strong desire to launch by all parties.

After yesterday's warning, we are also concerned that the company's continued marketing issues and lack of hit content will cap growth going forward. We are waiting until after Q3 earnings to formally update our numbers, but expect that 2005 estimates will end up in the range of $1,650M in revenue and $1.05 in EPS. Forecasting 2006 is somewhat of a wildcard since Jamba/Jamster has proven to be so unpredictable. Our best guess at the moment is that the Internet Services business will be up around 12% and that the Communications Services business will be flat to down, leaving total revenue and EPS up only slightly Y/Y.


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