It has been about a month since the last earnings report for VeriSign (VRSN). Shares have added about 0.6% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is VeriSign due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
VeriSign’s Q2 Earnings Top Estimates, Revenues Rise Y/Y
VeriSign reported second-quarter 2020 adjusted earnings of $1.32 per share, which beat the Zacks Consensus Estimate by 6.5% and recorded an increase of the same magnitude year over year.
Revenues increased 2.6% year over year to $314.4 million and beat the Zacks Consensus Estimate by 0.6%.
VeriSign ended the reported quarter with 162.1 million .com and .net domain name registrations, up 3.8% year over year.
The company processed 11.1 million new domain name registrations for .com and .net compared with 10.3 million in the year-ago quarter.
Notably, renewal rates are not fully measurable until 45 days after the end of the quarter. The final .com and .net renewal rate for the first quarter of 2020 was 75.4% compared with 75% for the year-ago quarter.
The company expects the renewal rate for second-quarter 2020 to be around 72.8%. The renewal rate in the second quarter of 2019 was 74.2%.
VeriSign’s research and development (R&D) expenses rose 21.7% from the year-ago quarter to $18.2 million. As a percentage of revenues, R&D expenses increased 90 basis points (bps) year over year to 5.8%.
General and administrative (G&A) expenses increased 11.2% year over year to $36.9 million. As a percentage of revenues, G&A expenses increased 90 bps year over year to 11.7%.
However, sales and marketing expenses (S&M) declined 28.3% year over year to $8.9 million. As a percentage of revenues, S&M expenses decreased 120 bps year over year to 2.8%.
Operating income was $206.7 million, up 2.5% from the year-ago quarter. Operating margin contracted 10 bps year over year to 65.8%.
Balance Sheet & Cash Flow
As of Jun 30, 2020, the company’s cash and cash equivalents (including marketable securities) were approximately $1.19 billion compared with $1.14 billion as of Mar 31, 2020.
Cash flow from operating activities was $215 million in the second quarter compared with $180 million in the previous quarter. Free cash flow was $169 million in the reported quarter.
In the second quarter, Verisign (NASDAQ:VRSN) repurchased 0.7 million shares for an aggregate cost of $150 million, which brings the total amount available for buybacks to $676 million.
Key Developments in Q2
Verisign announced that it will extend the freeze on registry prices for all its top-level domains, including .com and .net, through Mar 31, 2021.
Additionally, Verisign announced the extension of the waiver of the wholesale restore fee for expired domains through the end of 2020.
Domain name base is expected to increase between 2.75% and 4% from 2019-end to 2020-end.
Moreover, VeriSign expects full-year revenues between $1.255 billion and $1.265 billion.
GAAP operating margin is expected in the 64.5-65.5% range.
Capital expenditure is anticipated in the range of $45-$55 million.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
At this time, VeriSign has a nice Growth Score of B, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, VeriSign has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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