Verisign, Inc. (NASDAQ:VRSN), reported earnings today, .com/.net adds of 1.4M were inline with public sources, as search algorithm changes and macro incrementally pressured domain name activity. Revenue was $223.5M and the company controlled overall spending, driving EPS of $0.50 vs. street estimates of $0.49. Operating margins hit a high of 56.4%.


DoJ and DoC taking a closer look at .com contract pricing terms

This is an unexpected development, and management noted this may cause the contract renewal process to extend beyond the 11/30/12 expiration date, tripping an automatic 6-mo renewal. Management wasn’t able to give more detail than this.

Citigroup analysts were able to check with domain industry sources, who note that the DoJ hasn’t broadly queried industry participants on their views on price, which suggests the investigation is in early stages, or not prompted by industry pressure. The fact this review is being done under a new administration (prior contract was signed in 2006) suggests there may be some political motivation.

Citigroup notes that  other registry agreements have pricing provision and not enabling any .com price increase would be a significant departure from what has become a more standardized registry contracting process.

BAML analysts believe that the ongoing review of the agreement by the government, combined with the lack of any form of assuring commentary and/or details by management about the process, will undoubtedly raise questions in investors’ minds, regarding the company’s ability to maintain pricing power, which could negatively affect forward revenue growth and margin expansion (i.e., “Did VeriSign’s margins just simply fly too close to the sun for the federal government?”).

The decline in renewal rates for Verisign, Inc. (NASDAQ:VRSN) is being driven by: 1) changes to Google’s search engine algorithm, aimed at reducing the search ranking of domain selling sites; 2) slowing global economic activity. The fact that new name registrations remained relatively active at 7.8M, down just 1% yr-yr suggests macro weakness is having a modest impact.

The last time Google fine-tuned its search algorithm to try to reduce the search ranking of domain sales sites was 2009, and domain name growth slowed for about four quarters, as domain names (domain sales sites) that were no longer economical ran off.

Verisign, Inc. (NASDAQ:VRSN) shares are down close to 18%. According to Bloomberg, this is the largest drop for the company in a decade.

Disclosure: No position