Domain name registry operator Verisign (NASDAQ:VRSN) reported results in line with analysts' expectations in Q2 FY2023, with revenue up 5.71% year on year to $372 million. VeriSign made a GAAP profit of $185.7 million, improving from its profit of $167.3 million in the same quarter last year.
VeriSign (VRSN) Q2 FY2023 Highlights:
- Revenue: $372 million vs analyst estimates of $373.1 million (small miss)
- EPS: $1.79 vs analyst estimates of $1.75 (2.08% beat)
- Free cash flow of $138.8 million, down 45.2% from the previous quarter
- Gross Margin (GAAP): 86.5%, in line with the same quarter last year
While the company is not a domain registrar and does not directly sell domain names to end users, Verisign (NASDAQ:VRSN) operates and maintains the infrastructure to support domain names such as .com and .net.
The company manages well over 100 million domain names. Its specific role entails maintaining the master database of domain names and other information associated with them as well as providing services such as domain name registration, renewal, and management to registrars (like GoDaddy, who sells domains to end users). Lastly, Verisign is responsible for implementing cybersecurity measures to protect against threats and attacks.
Individuals, businesses, and organizations alike need a reliable and secure online presence so others can digitally view the classes offered at a gym, place an e-commerce order, or find out when a museum opens. This starts with a domain name that is easy to remember, represents a brand or identity, and can be accessed anywhere with an internet connection.
When a customer such as a small business registers a .com or .net domain name, the registrar they purchase the domain from (GoDaddy or Wix, for example) pays Verisign a fee for the registration and maintenance of that domain. Verisign generates revenue primarily through the registration and renewal of these domain names, as well as through the provision of internet security services.
While e-commerce has been around for over two decades and enjoyed meaningful growth, its overall penetration of retail still remains low. Only around $1 in every $5 spent on retail purchases comes from digital orders, leaving over 80% of the retail market still ripe for online disruption. It is these large swathes of the retail where e-commerce has not yet taken hold that drives the demand for various e-commerce software solutions.Competitors offering registry services include Alphabet (NASDAQ:GOOGL), GoDaddy (NYSE:GDDY) and China Internet Network Information Center.
As you can see below, VeriSign's revenue growth has been over the last two years, growing from $329.4 million in Q2 FY2021 to $372 million this quarter.
VeriSign's quarterly revenue was only up 5.71% year on year, which isn't particularly great. However, its revenue increased $7.6 million quarter on quarter, a strong improvement from the $4.8 million decrease in Q1 2023. This is a sign of acceleration of growth and very nice to see indeed.
Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 7.5% over the next 12 months.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. VeriSign's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 86.5% in Q2.
That means that for every $1 in revenue the company had $0.86 left to spend on developing new products, sales and marketing, and general administrative overhead. VeriSign's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that VeriSign is controlling its costs and not under pressure from its competitors to lower prices.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. VeriSign's free cash flow came in at $138.8 million in Q2, roughly the same as last year.
VeriSign has generated $856.6 million in free cash flow over the last 12 months, an eye-popping 58.8% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.
Key Takeaways from VeriSign's Q2 Results
With a market capitalization of $21.9 billion, a $935.6 million cash balance, and positive free cash flow over the last 12 months, we're confident that VeriSign has the resources needed to pursue a high-growth business strategy.
It was unfortunate that VeriSign's revenue slightly missed analysts' expectations, on the other hand free cash flow was still strong and in line with last year. Overall, this was a mixed quarter for VeriSign. The company is down 2.09% on the results and currently trades at $205 per share.
Is Now The Time?
VeriSign may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think VeriSign is a solid business. However, its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.
VeriSign's price to sales ratio based on the next twelve months of 13.9x indicates that the market is certainly optimistic about its growth prospects. There are definitely things to like about VeriSign and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.The Wall St analysts covering the company had a one year price target of $239.8 per share right before these results, implying that they saw upside in buying VeriSign even in the short term.
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