Verisign Earnings: Soft China Demand Weighs on Near Term, Valuation Cut 7% on Trimmed Margin Outlook

We lower our fair value estimate for wide-moat Verisign VRSN 7% to $210 primarily due to trimmed long-term profitability assumptions following a mixed second-quarter result. While we continue to expect domain price increases to boost already sky-high margins over the long term, we now factor in greater reinvestment in critical operational infrastructure and personnel, and lower than previously expected operating leverage to limit margin upside. This follows a slight year-on-year deterioration in margins of 30 basis points to 66.8% during the quarter. Nonetheless, we expect operating margins to reach a sizable 74% by 2032, down from our prior forecast of 78% and up from an already impressive 66% in 2022. At current prices, Verisign shares screen as fairly valued relative to our updated valuation.

Top-line growth of 6% during second-quarter fiscal 2023 was marginally below our expectations as lower registration and renewal activity in China dragged on the result, partly offset by further realization of domain price increases. New .com and .net registrations grew modestly by 0.1% year on year to 10.2 million for the second consecutive quarter, however, weak demand from China weighed on the .com and .net base that declined sequentially by 0.3 million to 174.4 million domains.

Following the result, we have marginally trimmed our full-year domain registration growth forecast to 0.5%, down from 1.5% and at the midpoint of updated guidance. However, our medium-term top-line growth forecasts are broadly unchanged as we now assume improved .net pricing from 2024 to offset lower domain registration growth. To our surprise, Verisign announced plans to increase .net pricing by 10% to $10.91 per year in February 2024, earlier than our forecast raise by the same amount in 2027. We now factor in the 2024 price increase and continue to assume .net pricing will increase in line with .com over the long term.