1. Please see page 11 for rating definitions, important
disclosures and required analyst certifications
Wells Fargo Securities, LLC does and seeks to do business with companies
covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of the
report and investors should consider this report as only a single factor in
making their investment decision.
June 6, 2012
Equity Research
VeriSign, Inc.
VRSN: Initiating Coverage With An Outperform Rating
• We are initiating coverage of VRSN with an Outperform rating. We
think the company can consistently grow revenue in the low double digits and
EPS at about 20%. Additionally, new gTLD’s should enable VRSN to supplement
growth by 2.5%/yr starting in late 2013. We also like the optionality in VRSN’s
emerging security business, which could grow to $50MM+ in revenue in the next
few years. Lastly, we think VRSN could increase leverage and buybacks once the
.com renewal is complete. Our 2012 and 2013 EPS estimates are $1.91 and $2.31,
respectively, and our valuation range is $45-47 per share.
• REVENUE GROWTH + MARGIN EXPANSION + BUYBACKS CREATE
ATTRACTIVE TOTAL RETURN PROFILE. With 5% ave annual price
increases and domain name growth consistently at 7-8%, VRSN should be able
to deliver rev growth in the low double digits. Margin expansion should drive
operating and net income growth of 15% and share repurchases should enable
the company to realize a ~20% EPS growth rate for the next three years.
• DEFENSIVE BUSINESS MODEL. VRSN’s contracts allow the company to
push through 7% price increases in .com domain names in 4 out of 6 years and
10% increases in .net names. Given that VRSN usually increases prices on both
registries at the same time, price increases have historically averaged 5% per
year. In addition, domain name growth has remained stable. Even during the
recession of late 2008/2009, domain name growth troughed at 5% (in mid-
2009) and VRSN was able to grow revenue in excess of 10%.
• NEW GTLD'S CREATE OPPORTUNITY TO SUPPLEMENT REVENUE
GROWTH. ICANN is in the process of accepting bids for new gTLD's. This is
expected to result in some 2,000 new domains coming into the marketplace.
VRSN has applied for 14 new gTLD's--12 of which are transliterations or foreign
language versions of the .com domain. In addition, VRSN has been selected to
run the back end for 220 brands. The company expects no significant revs from
this initiative in 2013. However, longer term, we think it could add 2.5% to the
revenue growth rate for 5 years starting in late '13. This would help VRSN
maintain low double digit top line growth even as .com and .net growth matures.
• OPPORTUNITY TO INCREASE LEVERAGE AFTER .COM RENEWAL.
While VRSN has provided no indication on longer-term target leverage, we think
the company could increase leverage after the .com renewal. Should VRSN
increase adjusted net leverage to 1.3x from 0.6x current (note: we tax foreign
cash) VRSN would have an additional $400MM in liquidity. This and core
business FCF would enable VRSN to repurchase $700MM in stock which
equates to ~12% of the company’s market capitalization over the next 12 months.
Valuation Range: $45.00 to $47.00 from NE to NE
Based on 19.5x - 20.5x 2013E EPS. Risks: potential cannibalization of .net due to
new gTLD's, noise around the .com renewal, and history of management turnover.
Investment Thesis:
We believe VRSN can consistently grow revenue in the low double digits and EPS
by ~20%. Additionally, we think new gTLD's will supplement growth longer term
and that VRSN could become more active on buybacks after the .com contract is
renewed.
Outperform
Sector: Internet Infrastructure
Overweight
Initiation of Coverage
2011A 2012E 2013E
CASH EPS Curr. Prior Curr. Prior
Q1 (Mar.) $0.32 $0.42 A NC $0.55 NE
Q2 (June) 0.39 0.47 NE 0.57 NE
Q3 (Sep.) 0.39 0.50 NE 0.59 NE
Q4 (Dec.) 0.40 0.53 NE 0.61 NE
FY $1.49 $1.91 NE $2.31 NE
CY $1.49 $1.91 $2.31
FY P/E 25.7x 20.1x 16.6x
Rev.(MM) $772 $880 $984
Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters
NA = Not Available, NC = No Change, NE = No Estimate, NM = Not Meaningful
V = Volatile, = Company is on the Priority Stock List
Cash EPS excludes stock comp, amortization expense,
and non recurring items.
Ticker VRSN
Price (06/05/2012) $38.33
52-Week Range: $27-44
Shares Outstanding: (MM) 158.9
Market Cap.: (MM) $6,090.6
S&P 500: 1,285.50
Avg. Daily Vol.: 1,701,950
Dividend/Yield: $0.00/0.0%
LT Debt: $1,350.0
LT Debt/Total Cap.: 20.0%
ROE: NM
3-5 Yr. Est. Growth Rate: 20.0%
CY 2012 Est. P/CASH EPS-to-
Growth:
1.0x
Last Reporting Date: 04/26/2012
After Close
Source: Company Data, Wells Fargo Securities, LLC estimates, and Reuters
Gray Powell, CFA, Senior Analyst
(212) 214-8048 / gray.powell@wellsfargo.com
2. WELLS FARGO SECURITIES, LLC
Communication Technology EQUITY RESEARCH DEPARTMENT
2
Company Description:
VeriSign is an Internet infrastructure provider whose primary line of business is managing the authoritative
directory for all .com and .net addresses on the web, known as generic top-level domains (gTLD). The
company also serves as the manager for the .name gTLD, .cc and .tv country-code top-level domains (ccTLD),
and operates the back-end systems for the .gov, .jobs, and .edu top-level domains. VeriSign manages over
115MM total domain names (1 out of every 2 globally) and processes over 30B+ transactions daily. In addition,
VeriSign has a small network security business. Headquartered in Reston, VA, VeriSign was founded in 1995
and has more than 1,000 employees.
INVESTMENT THESIS
We are initiating coverage on VRSN with an Outperform rating. We believe that the company can consistently
grow revenue in the low double digit range – driven by average 5% annual price increases and consistent
domain name growth in the 7% - 8% range. Additionally, we think new gTLD’s will create a $120MM revenue
opportunity longer term and enable VRSN to supplement growth by 2.5%/yr and maintain low double digit
revenue growth in 2014 and beyond. We also like the optionality in VRSN’s emerging security business which
could grow to generate $50 - $100MM in revenue in the next few years. Lastly, we think VRSN will be able to
increase leverage and further repatriate shareholders once the .com renewal is complete.
Our valuation range is $45 - $47/share based on 19.5x – 20.5x 2013E EPS. Risks to our range include
potential cannibalization of .net due to new gTLD’s, noise around the .com renewal, and history of
management turnover (which has been corrected).
BUSINESS OVERVIEW
Core DNS segment (est 95%+ of revenue):
VeriSign acts as a wholesaler for all .com and .net Internet names, and sells these domains to registrars who in
turn sell them to end users. Some of the larger and better-known registrars are Go Daddy, Enom, Tucows,
Network Solutions / Register.com (owned by Web.com Group), and Schlund and Partners.
Exclusive contracts with the Internet Corporation for Assigned Names and Numbers (ICANN)--an oversight
body for domain names--grant VeriSign the right to manage the .com and .net domain registries. The
contracts with ICANN are typically six years and have non-competitive rebidding provisions as long as
VeriSign maintains uptime within state SLA’s. Approximately 87% of VRSN’s domain name base is comprised
of .com names, ~13% from .net names, and less than 1% from other names. The company sells both one-year
and multi-year naming contracts. The average contract term for a domain has been about 13 months
historically.
Network Intelligence and Availability (NIA) segment (less than 5% of revenue):
VRSN also offers security and network solutions that are designed to take advantage of the shift towards cloud
computing. They offer three main products in this segment:
Managed DNS services provide faster Domain Name Services (DNS) response times, simplified DNS
management and support services that monitor customers’ Web servers to redirect DNS queries in the
event of an outage or service disruption. In simple terms, the service enables the internet to find a
company’s website faster and makes sure that the website is available even in the event of a network
outage. Customers pay a monthly subscription fee that varies depending on the number of queries and the
customer’s network requirements.
iDefense is a subscription-based service that allows enterprises to identify security threats and filter out
only those threats that are most relevant to their applications. This allows enterprises to proactively guard
against security threats while easing the burden of research threats not relevant to their line of business or
applications. Customers pay a recurring monthly subscription fee for iDefense.
DDoS Protection Services provide organizations with scalable Distributed Denial of Service (DDoS)
protection services to help websites stay online during attacks. Customers pay a monthly subscription fee
that varies depending on the customer’s network requirements.
Former CEO, Mark McLaughlin noted in May 2011 that the market for NIA services is $900MM-$1B today,
and is growing at a 13-15% CAGR. He also made comments implying that NIA could be a $50MM - $100MM
business for VRSN in three to five years. Since that time, VRSN has changed CEO’s and has not formally
disclosed revenues from the NIA business or the potential market opportunity. As a very rough exercise – we
3. WELLS FARGO SECURITIES, LLC
VeriSign, Inc. EQUITY RESEARCH DEPARTMENT
3
took VRSN’s average .com and .net domain names and an assumed ARPU based on VRSN’s contracted prices
with ICANN. We then backed out an estimate for VRSN’s domain name revenue to arrive at a very rough
estimate for VRSN’s NIA revenue. As a result, we believe that VRSN’s NIA business is currently running at a
$20MM annualized pace (so ~3% of VRSN total revenue) and think that the segment could be growing faster
than 25%/yr.
Revenue Generation
VRSN currently has two significant contracts with ICANN: one for.com domains and the other for .net:
.com: VeriSign collects a $7.85 fee for each .com domain name sold to end-users by registrars such as
GoDaddy. During the six year duration of the contract, VRSN has the option to increase prices four times,
at a rate of up to 7% per increase. The current (and final) price increase for this contact took effect on
1/15/12. The company is actively negotiating with ICANN to renew the .com contract for another six
years, and a decision is expected before the current contract expires on 11/30/12. We are highly confident
that VRSN will be able to successfully renew this contract. First, we note that the renewal is not subject to
an open bidding process as the contract with ICANN provides VRSN with the right of first refusal as long
as VRSN meets all mandated service level agreements. Additionally, the proposed renewal agreement has
identical terms to VRSN’s existing contract with regards to pricing. So far the renewal process appears to
be going smoothly. Once approved by ICANN – the proposal will be submitted to the Commerce
Department no later than 90 days prior to November 30, 2012 for final approval.
.net: VeriSign collects a $5.11 fee for each .net domain name sold to end-users by registrars such as
GoDaddy. The .net contract authorizes a 10% increase in any year over the life of the six year contract.
The current fee structure took effect 1/15/12, and VRSN renewed its contract with ICANN last year
through 6/30/17.
Others: Fees for the .name, .cc, and .tv top-level domains vary in price. However, transaction volumes
for these domains are so low that they do not have a material impact on revenue.
Historically, VRSN has announced price increases for .com and .net domains simultaneously. While VRSN has
pushed through all contractual .com price increases (7% four times in six years), the company has been more
reserved on .net increases. Generally speaking, VRSN has increased pricing on both domains in 4 out of 6
years. Given that .com equates to 87% of VRSN’s domain names and .net equates to 13% - the blended average
annual price increase nets to roughly 5%. We highlight VRSN’s historical .com and .net price increases in the
table below.
VRSN: Historical Summary of .com and .net Price Increases
Effective
Date of .com .net
Price Increase Old New % Change Old New % Change
1/15/2012 $7.34 $7.85 7% $4.65 $5.11 10%
7/1/2010 $6.86 $7.34 7% $4.23 $4.65 10%
10/1/2008 $6.42 $6.86 7% $3.85 $4.23 10%
late 2007 $6.01 $6.42 7% $3.50 $3.85 10%
Source: Company reports
The domain business is seasonal in nature, with Q1 generally being the strongest quarter of the year in terms of
net adds, as registrars implement a large portion of their annual marketing budgets. Registrars do this in an
attempt to start the year off strong and get the benefit throughout the course of the year. Historically, first-
time domain names renew at a 55-60% rate; second-time names, in the mid-70% range; and third-time and
beyond, in the high-80% range.
VeriSign generates 60% of revenue domestically and 40% internationally, and is largely immune from Fx
fluctuations on topline results, as revenues paid for .com and .net registrations are in U.S. dollars.
Furthermore, with ~12% of employees based offshore, the Fx impact on margins is minimal as well.
4. WELLS FARGO SECURITIES, LLC
Communication Technology EQUITY RESEARCH DEPARTMENT
4
Divestitures
In 2007, VRSN embarked on a four-year effort to divest several businesses that were outside of their core
competency. This restructuring saw the company unwind 13 separate business units, culminating in the sale of
their Authentication business to Symantec (SYMC) in 2010. VRSN was able to generate $2.3B from the
divestitures, leaving the company with its core DNS business and smaller network security business. Below,
we highlight VRSN’s key asset sales.
VRSN: Key Asset Sales Since 2007
Date Business Unit Price (in MMs)
Jan 2007 Jamba (51%) $192
Sept 2007 Jamba Services $13
Dec 2007 Retail Data Solutions $10
Mar 2008 Self-Care & Analytics $14
Apr 2008 CDN $1
Apr 2008 Digital Brand Management $50
Oct 2008 Communications Consulting $1
Oct 2008 Jamba (49%) $199
Dec 2008 Post-Pay Services $28
Dec 2008 EMEA Mobile Media $8
Apr 2009 International Clearing $0
May 2009 Communications Services $228
May 2009 Real-Time Publisher Services $2
July 2009 Managed Security Services $40
Oct 2009 Global Security Consulting $5
Oct 2009 Messaging/Mobile Media $172
Nov 2009 Mobile Delivery Gateway $19
August 2010 Authentication/Security/SSL $1,280
TOTAL: $2,263
Source: Company reports
Customer Exposure
All Internet providers rely on VRSN’s Internet registry services to route all communications to .com and .net
Internet addresses. Domain name registrars, including The Go Daddy Group (which accounts for 32% of
worldwide domain name registries), Enom, Tucows, Network Solutions / Register.com (owned by Web.com)
group pay VRSN for each .com and .net domain name they register on behalf of their customers.
There are approximately 900 registrars in the world. 90% of the business globally is driven by the top 10% of
registrars. GoDaddy is the world’s largest domain registrar and VRSN’s top customer, accounting for 30% of
revenue in 2011.
Source: Company reports
GoDaddy as % of Revenue
30%
26%
28%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
GoDaddy
% of Revenue, FY'09
% of Revenue, FY'10
% of Revenue, FY'11
5. WELLS FARGO SECURITIES, LLC
VeriSign, Inc. EQUITY RESEARCH DEPARTMENT
5
It is important to note that the loss of any one customer would not have a material adverse effect on VRSN, as
end-users would simply transfer their domains to one of VRSN’s other existing customers.
Competition
While VRSN does not face direct competition for the registry of .com and .net Internet domain names, it
competes with other companies that maintain the registries for different domain names. This includes
NeuStar Inc. (NSR, $31.37, Market Perform), manager of the .biz, .us, .co, .tel, and .travel top-level domains;
Afilias Limited, manager of the .org and .info registries; and managers of country-specific domain registries,
such as .uk for domain names in the United Kingdom. With this in mind, VRSN manages roughly 50% of the
world’s domain names, which is roughly 5x+ more than its closest peer Afilias. We highlight the largest
domain name registries and VRSN’s market share in the table below.
VRSN: 50% Market Share In Worldwide Domain Name Registries
Domain Market
Top 10 Domains Names (MM's) Share Registry Operator
.com 102.5 43.6% VRSN
.de 15.0 6.4% DENIC eG
.net 14.7 6.2% VRSN
.uk 10.1 4.3% Nominet UK
.org 9.9 4.2% Afilias
.info 7.9 3.4% Afilias
.nl 4.9 2.1% SIDN (Stichting Internet Domeinregistratie Nederland)
.ru 3.8 1.6% Coordination Center for TLD RU
.eu 3.6 1.5% EURid vzw/asbl
.cn 3.3 1.4% Computer Network Information Center, Chinese Academy of Sciences
Total Top 10 Domains 175.7 74.8%
Other Notable Domains
.biz 2.2 0.9% NSR
.us 1.8 0.8% NSR
Other (1) 55.3 23.5%
Total Domain Name Registrations 235.0 100.0%
Note: (1) Other domains primarily consist of ccTLD's
Source: Company reports and Hosterstats.com
With respect to Network Intelligence and Availability services, VRSN competes with companies such as iSight
Partners, Secunia ApS, Dell SecureWorks, McAfee, Inc., Prolexic Technologies, Inc., AT&T Inc., Verizon
Communications, Inc., Dyn, Inc.’s Dynect Platform, NeuStar Ultra Services, OpenDNS, BlueCat Networks,
Inc., Infoblox Inc., Nominum, Inc. and Afilias Limited.
INVESTMENT POSITIVES
REVENUE GROWTH + MARGIN EXPANSION + BUYBACKS CREATE ATTRACTIVE TOTAL
RETURN PROFILE. VRSN exhibits very consistent and predictable revenue growth that when combined
with margin expansion and share buybacks create an attractive total return profile.
Starting at the top line, VRSN is experiencing domain name growth in the 6% - 8% range. This combined with
average annual 5% price increases is driving revenue growth in the low double digit range. In addition,
margins have been expanding by 500 bps+ per year as management has reorganized the company and
improved their cost structure. Today VRSN operating margins stand at 52%. Some register operators have
noted that a registration business can be profitably run at $2 - $4 per year. Given that VRSN runs .com at
$7.85 per year and .net at $5.11 for a blended $7.49/yr implies that VRSN could achieve a 60%+ operating
income margin longer term. Out of conservatism - if we simply assume that incremental revenue comes in
with a 65% contribution margin - VRSN would be able to continue to expand margins by 140 bps per year.
This would enable the company to turn a 12% revenue growth rate into 15% growth in operating income.
Lastly, we assume that VRSN will continue to use the bulk of its FCF to buy back stock. This would enable
VRSN to buy back $320MM of stock per year, which equates to 5% of the company's market cap. If we net out
dilution related to option grants, VRSN's 15% operating income growth rate could be translated into EPS
growth of ~20% for the next 3 years. We highlight our rough math in the table below.
6. WELLS FARGO SECURITIES, LLC
Communication Technology EQUITY RESEARCH DEPARTMENT
6
VRSN: Normalized Growth Projections
Scale for $'s not meaningful 3 Yr. 3 Yr.
Today Target CAGR Comment
Revenue $100.0 $139.0 11.6% Current growth rate of 13% slowing on larger revenue base over time.
Operating Income $50.0 $75.4 14.6% Assume 65% contribution margins - yields 140 bps / year expansion
Net Income $34.0 $51.7 15.0% Assume 30% non GAAP tax rate
Shares 100 88 NA Assume 4% shares net of options repurchased per year
EPS $0.34 $0.59 20.0% Margin expansion and repos drive EPS growth of 20%
Source: Company reports and W ells Fargo Securities, LLC estimates
DEFENSIVE BUSINESS MODEL. VRSN's DNS business exhibits very defensive characteristics, which we
believe provides a high degree of revenue visibility even in a weak macro environment. As we have discussed,
VRSN consistently pushes through 5% average annual price increases. Furthermore, domain name growth has
remained positive even during weak economic times. In fact, the only time .net and .com domains experienced
a decline in registries was back in 2002 during the tech bubble collapse. More recently, VRSN still experienced
domain name growth in the H2 2008 and 2009 recession. Despite the weak macro environment in 2H'08 and
2009 - VRSN added on average 1.6MM new domains per quarter (7% annual growth) and grew revenue 12% in
2009. Assuming similar domain name growth in a downside scenario on today's base - VRSN would grow its
customer base by 5% per year. This combined with 5% average annual price increases would translate into
10% revenue growth, which we think is pretty good for a downside scenario.
While a $7.85 fee with a 5% annual price increase for a .com registry appears expensive - we note that the fee is
by far the smallest component of any company's infrastructure costs. To put the fees to VRSN in perspective -
we examine a few offerings from Go Daddy. For a company purchasing only the domain name and no
additional services - Go Daddy charges $12.99 per year and makes a 40% gross profit, which is pretty good
considering that Go Daddy does little other than create cool Super Bowl commercials for this part of the
business. However, Go Daddy also sells additional services on top of domain name registration. For example,
a small business can run a very basic 5 page website with a photo album and search engine visibility for $89.25
per year. Thus, VRSN's .com fee equates to just 9% of the cost of even a very basic website for a small local
business. We highlight the two Go Daddy offerings in relation to VRSN’s annual registry fee in the chart below.
VRSN: Registry Fees - A Very Small Portion of Infrastructure Costs
Actual $'s
2 Year Example: Domain Name Plus Site Builder Services
5 Page Economy Website
2 years for $56.88/yr $113.76
.com yr 1 $1.99
.com yr 2 $14.99
Basic Website & Domain Cost - 2 Years $130.74
Average Annual Cost $65.37
Search Engine Visibility $23.88
Total Cost $89.25
VRSN Fee $7.85
% of GoDaddy Revenue 8.8%
Simple .com Registry - 1 Year Term
GoDady Price 12.99
VRSN Fee 7.85
% of GoDaddy Revenue 60.4%
Source: Company reports
NEW GTLD'S CREATE OPPORTUNITY TO SUPPLEMENT REVENUE GROWTH. ICANN is in the
process of accepting bids for new gTLDs. This is expected to result in some 2,000 new domain names coming
into the marketplace. While there is some small potential cannibalization risk - on the .net side - we think the
7. WELLS FARGO SECURITIES, LLC
VeriSign, Inc. EQUITY RESEARCH DEPARTMENT
7
gTLD process will create an opportunity for VRSN to supplement revenue growth by almost 2.5% on an annual
basis starting in late 2013. Specifically, VRSN has applied for 14 new gTLD's - 12 of which are transliterations
or foreign language versions of the .com domain. In addition, VRSN has been selected to run the back end for
220 brands. Examples could include .nike, .cocacola, .paris, etc. The company expects no significant revenue
from this initiative in 2013. However, longer term, we think it could be a meaningful positive for the company
- adding 2.5% to the revenue growth rate for 5 years starting in late 2013.
Specifically, we think the locally translated .com domain penetration could exhibit a similar opportunity to that
of country level domain names like .de, .uk, .nl, etc. Along these lines, the top 10 country level domains
account for almost 50MM registered sites. The math here is very rough. But assuming that VRSN takes a 50%
market share - the company could be managing 25MM domains in 5 years conservatively at a price of $4 per
domain - which equates to a $100MM annual revenue opportunity. Assuming it takes 5 years to scale into the
opportunity, the new gTLDs would add $20MM per year to VRSN's revenue or 2% to the growth rate each
year.
In addition, VRSN has been chosen to provide back end systems for 220 brands. There is not a great comp for
this structure and most brands would likely have only a small number of registered sites. Anecdotally, we have
heard of small domain deals under fixed fee contacts at $50K - $150K per year. For larger contracts in this
sub-segment, we think a deal could look similar to the .gov contract that VRSN won with the U.S. In early
2011, this contact had a total value of $3.3MM for 1 year with 4 one year renewal options. We estimate this
contract equates to about $600K per year. Again, the math is very rough - but simply assuming a price of
$100K/ year for 220 brands would equate to a $22MM per year revenue opportunity for VRSN. We think the
full benefit would be realized as early as 2014, but that growth off of the initial $22MM base would be limited
due to the fixed fee nature of the contract.
All in, we estimate that the gTLD program could add $120MM+ in revenue to VRSN over a 5 year period.
While the potential revenue would not start to be realized until late 2013 - we think the new gTLDs could
supplement VRSN's revenue growth by 250 bps per year, which would help the company maintain a low
double digit top line growth rate even as .com and .net growth matures.
OPPORTUNITY TO INCREASE LEVERAGE AFTER .COM RENEWAL. While VRSN management
has provided no indication as to the company’s longer term target leverage, we think the company could
increase leverage after the .com renewal as VRSN likely would then have a very high degree of visibility on its
cash flow profile over the next 6 years. Specifically, we think VRSN could increase leverage to 1.3x adjusted net
debt to 2013E EBITDA from roughly 0.6x today. This would be a similar net leverage level to that of NeuStar
Inc. (NSR), which runs a similar business. As a result, VRSN would generate an additional ~$400MM in
liquidity on top of the $320MM in estimated 2013 FCF. Thus, we think VRSN could repurchase $700MM in
stock (net of incremental interest expense), which would equate to about 12% of the company’s market
capitalization over the next 12 months.
VRSN: Outlining the Ability to Increase Leverage
$'s in millions
Adjusted
Q1'12A Q1'12A
Cash - Domestic $245 $245
Cash and Equivalents - Foreign $1,141 $742 Tax foreign cash at 35%
Total Cash and Equivalents $1,386 $987
Credit Facility $100 $100 2.0 - 2.5% debt
Face Value of Convert $1,250 $1,250
Net Debt ($36) $363
2013E EBITDA $586 $586
Current Net Leverage -0.1x 0.6x
Target Leverage Est 1.3x Similar to NSR pro forma net leverage
Target Net Debt - 2013E $762
Additional Liquidity $398
2013E FCF $320 Fully taxed
Incremental Interest Expense ($14) Assume mix senior debt, 5% - 6% and credit facility at 2.0% - 2.5%
Total Potential Liquidity $705
Source: Company reports and Wells Fargo Securities, LLC estimates
8. WELLS FARGO SECURITIES, LLC
Communication Technology EQUITY RESEARCH DEPARTMENT
8
INVESTMENT RISKS
NEW GTLD’S COULD CANNIBALIZE .NET DOMAINS. While new gTLD’s should be a net positive for
VRSN and help the company supplement revenue growth longer term, we think there is some potential risk of
cannibalization on the .net side. Specifically, there will be 200+ new gTLD’s likely introduced in mid to late
2013. Most of these are narrow in focus and many are industry and geographic specific. See below for a partial
list of gTLD’s.
Sample New gTLD's by Category
Generic .shop, .site, .web
Music Arts .art, .film, .movie, .music
Real Estate .mls
Tech .pad, .phone, .app
Cities .berlin, .miami, .nyc, .paris
People .fam, .health, .social
Source: ICANN
Most new gTLDs that have been introduced over the last 10 years have seen limited success. While .info –
which was introduced in 2001 has grown to over 8.0MM domain names other gTLD’s like .biz only have 2MM
names and gTLD’s like .pro, .name, and .travel have less than 150K names. However, we believe that a few
names such as .web, .site, .pad, or .social could potentially generate some moderate success and cannibalize
.net.
On an historical basis – ICANN has expanded gTLDs in 2001 and 2005.
• 2001 – New names introduced -- .aero, .biz, .coop, .info, .museum, .name, and .pro.
• 2005 – new names introduced -- .asia, .cat, .jobs, .mobi, .tel, and .travel
In 2005 and 2006 – there was no discernable impact on .net and.com growth related to the introduction of
new gTLDs. In fact, .com domains grew at a 41% annual pace in 2005 / 31% in 2006 vs. 27% in 2004 while
.net grew at a 28% pace in 2005 / 29% in 2006 vs. 22% in 2004.
Looking at 2001 – it appears that there could have been some impact on .net growth related to the
introduction of .info because the growth rate of .net diverged meaningfully from that of .com. We admit that
trend is hard to dissect because both .com and .net domains declined in 2002 – likely due to the weak economy
and the bursting of the technology bubble. However, we note that .net meaningfully underperformed .com in
2002 – declining 15% from 2001 vs. a 5% decline in .com.
VRSN: Deviation in .net Growth After New gTLD's Introduced in 2001
Domain Names in 000's
12/22/00 12/11/01 12/15/02 12/17/03
.net 3,888.1 4,320.4 3,684.7 4,293.7
Yr./Yr. Growth NA 11.1% -14.7% 16.5%
.com 20,652.2 23,198.7 21,991.8 25,850.0
Yr./Yr. Growth NA 12.3% -5.2% 17.5%
Source: webhosting.info
Therefore, in a reasonably bad scenario – we could assume that new gTLD’s cannibalize 10% of .net names.
Even under this conservative assumption, we think the impact to VRSN would be minimal as .net accounts for
slightly less than 10% of revenue. Thus, a 10% cannibalization rate in .net names would create an impact of
under 1% or less than $10MM to VRSN revenue in 2014. Furthermore, we think this risk would be outweighed
by the benefits of signing new gTLD’s and running the back end systems for other domains, as we previously
discussed.
9. WELLS FARGO SECURITIES, LLC
VeriSign, Inc. EQUITY RESEARCH DEPARTMENT
9
HISTORY OF MANAGEMENT CHANGEOVER AND BUSINESS DIVESTITURES. Following several
quarters of disappointing results and an ill-fated attempt to diversify VRSN into several businesses outside its
core competency, VRSN underwent a significant restructuring starting in 2007. The company began an
extensive four-year effort to unwind previous acquisitions, which ultimately saw VRSN divesting 13 separate
business units, culminating in the sale of their Authentication business to Symantec in 2010.
Furthermore, VRSN has had four different management teams over the past five years. In August 2011,
Chairman and Founder Jim Bidzos became CEO on a permanent basis. The changes have had investors
questioning the company’s growth expectations and overall business strategy. We believe some of the
overhang on the stock has now been removed with the appointment of Bidzos as CEO and VRSN’s newfound
focus on its core naming business. In addition, VRSN recently hired a new CFO – George Kilguss – formerly
CFO of Internap Network Services (INAP, $6.91, Outperform). We know Mr. Kilguss from our coverage of
INAP and have a high degree of respect for his work at the company over the last few years and the level of
financial disclosures he provided into INAP’s data center business. As such, we think most concerns around
historical management turnover should be relieved. However, with a volatile history – we think investors will
likely be cautious should VRSN attempt to diversify away from its core naming business even if the company is
moving into tangential sectors.
ANTI-TAKEOVER PROVISIONS. VRSN does have some anti-takeover provisions which could limit the
potential for the company to be acquired – or at least receive a non-solicited take-over bid. Specifically, VRSN
has a shareholders’ rights plan which allows existing shareholders to purchase stock at a 50% discount to the
market price if any entity acquires a 20% stake in the company. Thus, in the event of a hostile takeover bid, an
existing shareholder would have to increase their stake in the company or risk being diluted.
POTENTIAL LEGAL CLAIMS OR CHALLENGES TO .COM AND .NET EXCLUSIVITY. While we do
not know of any major challenges to VRSN’s position as the exclusive operator of.com and .net registries, the
company has faced legal challenges in the past. Most notably, a lobbying group named CFIT (Coalition for
ICANN Transparency) was involved with a lawsuit with VRSN from 2006 to 2011 alleging that VRSN won its
ICANN contacts without any competitive bidding. After losing in various courts and going through a lengthy
appeals process, CFIT dropped the lawsuit in 2011. As such, we think there is very little risk to VRSN’s status
as the exclusive operator of .com and .net registries.
VALUATION AND CONCLUSION
We believe VRSN can consistently grow revenue in the low double digit range – driven by average 5% annual
price increases and consistent domain name growth in the 7% - 8% range. Additionally, we think new gTLDs
will create a $120MM revenue opportunity longer term and enable VRSN to supplement growth by 2.5%/yr
and maintain low double digit revenue growth in 2014 and beyond. We also like the optionality in VRSN’s
emerging security business which could grow to generate $50 - $100MM in revenue in the next few years.
Lastly, we think VRSN will be able to increase leverage and further repatriate shareholders once the .com
renewal is complete.
Our valuation range is $45 - $47/share based on 19.5x – 20.5x 2013E EPS. Risks to our range include
potential cannibalization of .net due to new gTLD’s, noise around the .com renewal, and history of
management turnover (which has been corrected).
12. WELLS FARGO SECURITIES, LLC
Communication Technology EQUITY RESEARCH DEPARTMENT
12
$18.00
$20.00
$22.00
$24.00
$26.00
$28.00
$30.00
$32.00
$34.00
$36.00
$38.00
$40.00
$42.00
5/27/09
6/24/09
7/22/09
8/19/09
9/16/09
10/14/09
11/11/09
12/9/09
1/6/10
2/3/10
3/3/10
3/31/10
4/28/10
5/26/10
6/23/10
7/21/10
8/18/10
9/15/10
10/13/10
11/10/10
12/8/10
1/5/11
2/2/11
3/2/11
3/30/11
4/27/11
5/25/11
6/22/11
7/20/11
8/17/11
9/14/11
10/12/11
11/9/11
12/7/11
1/4/12
2/1/12
2/29/12
3/28/12
4/25/12
5/23/12
SecurityPrice
NeuStarInc.(NSR)3-yr.PricePerformanceNeuStarInc.(NSR)3-yr.PricePerformance
Date
Date PublicationPrice($) RatingCode Val.Rng. Low Val. Rng. High ClosePrice($)
3/5/2012 Powell
3/5/2012 34.71 2 37.00 38.00 34.71
Source: WellsFargoSecurities,LLCestimatesandReutersdata
Symbol Key RatingCodeKey
RatingDowngrade Initiation,Resumption,DroporSuspend 1 Outperform/Buy SR Suspended
RatingUpgrade Analyst Change 2 MarketPerform/Hold NR Not Rated
ValuationRangeChange SplitAdjustment 3 Underperform/Sell NE NoEstimate
13. WELLS FARGO SECURITIES, LLC
VeriSign, Inc. EQUITY RESEARCH DEPARTMENT
13
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
6/2/09
6/30/09
7/28/09
8/25/09
9/22/09
10/20/09
11/17/09
12/15/09
1/12/10
2/9/10
3/9/10
4/6/10
5/4/10
6/1/10
6/29/10
7/27/10
8/24/10
9/21/10
10/19/10
11/16/10
12/14/10
1/11/11
2/8/11
3/8/11
4/5/11
5/3/11
5/31/11
6/28/11
7/26/11
8/23/11
9/20/11
10/18/11
11/15/11
12/13/11
1/10/12
2/7/12
3/6/12
4/3/12
5/1/12
5/29/12
SecurityPrice
InterNap Network Services Corp. (INAP) 3-yr. Price PerformanceInterNap Network Services Corp. (INAP) 3-yr. Price Performance
Date
Date Publication Price ($) Rating Code Val. Rng. Low Val. Rng. High Close Price ($)
6/2/2009 NA SR NE NE 3.05
9/22/2010 Powell
9/23/2010 4.65 1 5.80 6.20 4.85
11/5/2010 5.18 1 6.00 6.40 5.29
2/3/2011 7.67 1 9.70 10.30 7.67
2/24/2011 6.63 1 9.60 10.70 6.63
4/28/2011 8.22 1 9.30 10.40 8.22
7/28/2011 6.31 1 8.40 9.50 6.31
9/16/2011 Hausner
9/16/2011 5.23 SR NE NE 5.72
11/21/2011 Powell
11/21/2011 4.80 1 6.60 7.20 4.80
1/4/2012 5.83 1 7.00 7.50 5.83
2/24/2012 7.46 1 9.30 9.90 7.77
Source: Wells Fargo Securities, LLC estimates and Reuters data
Symbol Key Rating Code Key
Rating Downgrade Initiation, Resumption, Drop or Suspend 1 Outperform/Buy SR Suspended
Rating Upgrade Analyst Change 2 Market Perform/Hold NR Not Rated
Valuation Range Change Split Adjustment 3 Underperform/Sell NE No Estimate
Additional Information Available Upon Request
I certify that:
1) All views expressed in this research report accurately reflect my personal views about any and all of the subject securities or
issuers discussed; and
2) No part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed
by me in this research report.
Wells Fargo Securities, LLC maintains a market in the common stock of VeriSign, Inc., InterNap Network Services Corp.,
NeuStar Inc.
Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in
the next three months from NeuStar Inc., InterNap Network Services Corp.
Wells Fargo Securities, LLC or its affiliates may have a significant financial interest in InterNap Network Services Corp., VeriSign,
Inc., NeuStar Inc.
Wells Fargo Securities, LLC or its affiliates intends to seek or expects to receive compensation for investment banking services in
the next three months from an affiliate of NeuStar Inc.
Wells Fargo Securities, LLC or its affiliates received compensation for investment banking services from an affiliate of NeuStar
Inc. in the past 12 months.
14. WELLS FARGO SECURITIES, LLC
Communication Technology EQUITY RESEARCH DEPARTMENT
14
INAP: Risks include pricing pressure in the IP business, data center competition, and lack of ownership of hard assets.
NSR: Risks to our range include the NPAC renewal in 2015, acquisition integration risk, and economic headwinds to non NPAC
business lines.
VRSN: Risks: potential cannibalization of .net due to new gTLD's, noise around the .com renewal, and history of management
turnover.
Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions.
Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability
and revenue of the firm, which includes, but is not limited to investment banking revenue.
STOCK RATING
1=Outperform: The stock appears attractively valued, and we believe the stock's total return will exceed that of the market over the
next 12 months. BUY
2=Market Perform: The stock appears appropriately valued, and we believe the stock's total return will be in line with the market
over the next 12 months. HOLD
3=Underperform: The stock appears overvalued, and we believe the stock's total return will be below the market over the next 12
months. SELL
SECTOR RATING
O=Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months.
M=Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months.
U=Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months.
VOLATILITY RATING
V = A stock is defined as volatile if the stock price has fluctuated by +/-20% or greater in at least 8 of the past 24 months or if the
analyst expects significant volatility. All IPO stocks are automatically rated volatile within the first 24 months of trading.
As of: June 6, 2012
48% of companies covered by Wells Fargo Securities, LLC
Equity Research are rated Outperform.
Wells Fargo Securities, LLC has provided investment banking
services for 41% of its Equity Research Outperform-rated
companies.
50% of companies covered by Wells Fargo Securities, LLC
Equity Research are rated Market Perform.
Wells Fargo Securities, LLC has provided investment banking
services for 31% of its Equity Research Market Perform-rated
companies.
2% of companies covered by Wells Fargo Securities, LLC
Equity Research are rated Underperform.
Wells Fargo Securities, LLC has provided investment banking
services for 21% of its Equity Research Underperform-rated
companies.
Important Disclosure for International Clients
EEA – The securities and related financial instruments described herein may not be eligible for sale in all jurisdictions or to certain
categories of investors. For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited
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Instruments Directive 2007. The FSA rules made under the Financial Services and Markets Act 2000 for the protection of retail
clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for,
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instruments described herein are not intended for sale, nor will be sold, to any person other than professional investors (as defined
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