VeriSign (VRSN)

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See all Bulls Reasons Bulls: Reasons To Buy VeriSign well positioned to lead the charge towards EV-SSL 0% agree VeriSign well positioned to lead the charge towards EV-SSL VeriSign is the market leader for the well-known SSL security and authentication system, putting it in prime position to push the next level of transaction security, EV-SSL. View or Edit Reason 0 votes 0% agree VRSN is finally shaping up 0% agree VRSN is finally shaping up The company's new CEO has publicly recognized the problem with VeriSign's past expansion strategy; it is very likely that extraneous businesses that do not contribute to profitability will be cut in the future, streamlining what is now a large and overgrown corporation. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell The commoditization of security software has reduced revenues and margins 0% agree The commoditization of security software has reduced revenues and margins The commoditization of security software has forced prices down throughout the industry, causing profitability to fall. View or Edit Reason 0 votes 0% agree Stewardship an issue 0% agree Stewardship an issue Poor corporate stewardship has led the company astray in the past, and though new executives have recognized VeriSign's fundamental problems, their short tenure with the company makes their success difficult to predict. View or Edit Reason 0 votes 0% agree Government regulation limits profitability 0% agree Government regulation limits profitability Government regulation of VeriSign's registrar business, while guaranteeing revenue, puts a cap on potential profitability, which is VeriSign's most pressing problem at this time. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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As the market leader for SSL authentication, the system of certificates and tokens that protects most internet transactions, and also as a powerful enterprise security provider, VeriSign stands to gain from the rising demand for digital protection as the internet becomes a more versatile and interactive tool. The company also has an exclusive license for the registration of new and existing internet domains. This business provides the Verisign with an unexciting but stable source of revenue.

Although the company has strong telecommunications, internet security, and web registration businesses, its profitability has suffered as a result of its poorly performing non-core businesses; the firm has acquired many such businesses in recent years in an attempt to boost revenue. Unfortunately, higher revenue does not always equal greater profitability. The company had a paltry 6% operating margin, compared with competitor Microsoft's 32%.

In addition to its portfolio of non-core businesses, the company is currently threatened by the commoditization of security software, as falling prices depress profitability; while poor corporate governance in the past led the company to its current, low level of profitability, a new CEO and CFO could provide the leadership VeriSign is looking for to restore profit growth and increase competitiveness with industry giants such as Microsoft, Symantec, and Yahoo!.

[edit] Company Overview

VeriSign is a digital infrastructure company. A wide variety of products and services used to operate and secure thousands of millions of everyday interactions on the Internet and over the world's telecommunications networks makes VeriSign one of the leading tech companies to offer software as service. The company has two major subdivisions: internet services and communications services.

[edit] Internet Services (56% of revenue)

As the creator of the internationally-used security system that safeguards the majority of internet transactions and the holder of a government-sanctioned monopoly over the official registration of most major web URLs, VeriSign is deeply embedded in the way people use the internet every day.

[edit] Security

VeriSign is the producer of the Secure Socket Layer (SSL) encryption and authentication system that protects the majority of the interactions that take place on the internet every day. The SSL system consists of a web domain giving an SSL certificate to an incoming web browser; the certificate represents a third party authentication that the web site is indeed operated by who it claims, and that every transaction made on the SSL secure website afterwards is encrypted to outside view. The SSL system is found on thousands of web sites; 93% of Fortune 500 companies and 40 of the world's most prominent banks use SSL encryption. An SSL certificate is generally recognized as the most trustworthy security mark on the internet. VeriSign also produces a long line of enterprise security and authentication products aimed at assessing risk and protecting businesses and consumers from intrusion and fraud.

[edit] Internet Domain Registrar

With the government-granted privilege of being the authentic master registrar for all .com, .net, .cc, and .tv web domains, VeriSign has the power to collect annual registration fees ($6 for each .com, $4 for .net) and the responsibility of making registered web sites accessible all over world the through its global infrastructure. Furthermore, VeriSign offers software to help smaller registrars increase their market area and to help domain owners obtain the most recognizable/profitable domain names.

[edit] Communications Services (44% of revenue)

VeriSign has its fingers in a wide spread of telecom honey pots; spread between the wireline and wireless media sectors, the company deals in content delivery, interactivity, mobile media, intelligent data storage, and consulting services. Among the company's communications highlights:

• As owner of the largest Signal Switching 7 (SS7) network in the Americas and with another large network in Asia, the company has enough infrastructure to offer powerful digital connectivity and VoIP services to enterprise customers.
• VeriSign offers powerful intelligent network storage services, allowing easier data access to enterprise wireline, wireless, and broadband operators.
• The company owns the largest Calling Name Database in the U.S., and has agreements with a number of major independent U.S. databases to allow paid access to VeriSign's database. It also sells access to toll-free call routing (e.g. 800, 888, 877, 866) for U.S. and Canadian carriers.
• With enterprise billing and commerce software and services, VeriSign eases digital transactions, even through mobile platforms. The company even enables secure mobile banking with its software.
• Content-delivery solutions by VeriSign enable companies (like News Corp to deliver high-quality video and data transmissions quickly and cheaply; its mobile delivery system can reach over 600 million people and enables carriers to deliver wireless content in the same way.
• VeriSign's interactive software services allow companies to create a diverse number of user-friendly applications, from digital sweepstakes to online voting.
• The company's intelligent real-time publishing software allows companies to work with and distribute huge amounts of frequently-updated digital content.

[edit] A New CEO Brings a New Expansion Strategy

In the past few years, VeriSign's expansion strategy has been focused on raising revenues and not profit margins. To achieve revenue growth, the company would acquire any business it could:

• The acquisitions of 3United, m-Qube, Qpass, mBlox, LightSurf, and Jamba in 2005/2006 extended VeriSign's hand into the field of global content management and delivery.
• In 2006, the company's acquisition of CallVision furthered its entry into the digital billing industry.
• To strengthen its presence in security services, VeriSign acquired GeoTrust in 2006.

These acquisitions have led to a company that is spread much too thin across too many business lines. Recently appointed CEO William Roper recognizes this and is taking a "hard look" at the company's various business lines. One can only hope that in the near future we will see VeriSign divest its unprofitable/noncore operations. In the same vein, management has moved to reduce redundancy. The recent unification of the sales force and combination of the implementation and consulting groups at VeriSign signal a new focus on profitability rather than on revenue.

[edit] Geographical Distribution

Source: Annual Report

EMEA revenues increased from '04 to '05 and then decreased from '05 to '06 because of fluctuations in the earnings of its Jamba digital content distribution service. The United States segment has seen revenue gains due to transaction security and .com/.net domain name increases, and APAC's growth can be attributed to enterprise security growth in Japan and Australia.

[edit] Trends and Forces

[edit] The Increasing Power of the Internet Will Lead to Greater Security Demand

Formerly the information superhighway, the internet is well into its transformation as a global marketplace. From shopping for clothes to booking travel plans, the internet has become a massive commercial center where millions of interactions take place every day. People routinely turn to the internet to complete their transactions in order to save both time and money. The sheer volume of these transactions will only increase over time as people in emerging economies turn to the internet as well. From 2003 to 2004 alone, internet sales processed by VeriSign's payment services increased by 21% during the Christmas season; with much rapid growth occurring worldwide since then, further increases in transaction quantities are apparent.

Web 2.0, the internet paradigm shift that focuses on user interactivity and user generated content, is another major driver of internet growth. With the implementation of this new vision of the internet, users will be able to use web sites in novel ways: applications will respond to user needs more fluidly, data will be interpreted in new and powerful ways, and advertisements will react to user interactions to become more appealing to individuals.

Together, Web 2.0 and the increasing use of the internet as a marketplace will make the internet an even more powerful and useful tool than it already is; the only drawback is that more complex and powerful data flowing around means that more complex and powerful security will be needed to safeguard both companies and consumers from identity theft, intrusion, and fraud. This rise in demand for the quantity and quality of digital security has the potential to greatly benefit VeriSign. The company is already the premier provider of internet authentication security, and has a number of product lines to help e-commerce firms move money and products easily and securely. It has already taken a step forward and developed a new, more powerful version of its SSL authentication, called extended validation SSL (EV-SSL); the format is rapidly replacing SSL as the new standard in transaction security and authentication.

[edit] Increasing Security Threats Will Drive Greater Security Demand

With the increasing power of the internet comes the increasing threat of security breaches. Modern hackers are quick, intelligent, and malicious; there many ways for people to break into a network for the purpose of stealing money, passwords, credit card numbers, and other personal information. Over the past few years there has been an increase in both the number and complexity of such attacks. Hackers used to program their own computers to send out millions of "spam" emails; now, they can send a malicious piece of code that will turn the victim's computer into a "zombie" that will send out the emails for them. This is just one example of how the malicious code industry has evolved in the past few years. More intrusion means the need for more security; with its prime industry position, VeriSign is well positioned to take advantage of this trend.

[edit] The Commoditization of Telecom Services has Lead to Pricing Pressure

Many telecommunications services are difficult to differentiate between businesses. Security, for instance, is difficult for a company to provide in a way that is meaningfully different from competing security software; they all protect against the same viruses, block intruders, and keep sensitive information encrypted. Because of this, much competing between leading telecom software companies is price competition. Telecom services, in other words, have become commoditized. Price competition leads to lower prices, lower prices lead to lower revenues, and lower revenues mean lower profits. While many of VeriSign's products are sensitive to commoditization, the company holds a virtual monopoly over others (e.g. SSL encryption or .com/.net registration). Thus, while falling price hurt the company's revenues, profitability is not affected as negatively as it otherwise would be.

[edit] Government Regulation of the Registrar Business caps profit and revenue

VeriSign's internet registrar business is granted its authority by the government; essentially, the government guarantees registration revenue to VeriSign. The same government authority, however, regulates the fee that the company charges for registration, effectively capping revenues and profitability. When regulators allow VeriSign to raise prices (as they will in October 2007), the company benefits from immediate revenue increases. If the government, however, were to force lower prices or grant the registrar rights to another company once the contracts expire in 2012, the opposite would occur.

[edit] Poor Stewardship has been Weighing the Company Down

With a stock-option backdating scandal forcing the company to pay over $170 million in extra pretax expenses and rewrite financial statements for 2002 - 2005, investors should be aware that poor corporate governance has cost VeriSign heavily in the past. Furthermore, CEO William Roper and CFO William Clement have both been with the company for less than a year, making their future performance difficult to predict. Overall, with 3% of company stocks being granted as options for three years straight and two executive resignations in only a few months time, VeriSign has been a less than stellar model for corporate stewardship of shareholder interests.

[edit] Competition

As a digital media and security company, VeriSign faces competition from companies like Microsoft, Symantec, McAfee, Entrust, and RSA Security. As a communications company, VeriSign's competition includes Amdocs, Yahoo!, NeuStar, Vonage, and CyberSource. VeriSign is well positioned in four of its core businesses: SSL encryption, SS7 networking, calling name databases, and URL registration; however, with too many diverse businesses acquired over the years, competitors have more focus than VeriSign in other areas.

SSL encryption has become a ubiquitous form of encryption and authentication, and as of 2005, VeriSign owned over half the market, followed by GeoTrust, Comodo, GoDaddy, and Entrust respectively. With a hefty lead over its next competitor, VeriSign has set itself up to be the leading purveyor of the upgraded SSL form, EV-SSL. Similarly, with the largest SS7 telecom network in the America's and the largest calling name database in the U.S., VeriSign has entrenched itself in the communications industry; it would take a shift to another network standard than SS7 for the company to lose its network market, and competing companies pay VeriSign for access to its name database.

While there are many smaller registrars for .com and .net addresses on the net, these registrars must ultimately register web addresses directly to VeriSign. This is because the U.S. government has granted VeriSign the power to regulate web addresses, a power that has created a steady revenue stream for the company and will bring in more revenue as registration fees go up in the next year.

In the past few years, it has been established that the company stretched itself too thin by buying into a number of new industries. Companies like Intuit and H&R Block already have solid holds on the billing software market, Apple, Microsoft, and Adobe are well-established contenders in the interactive media market, and the multimedia content delivery industry is highly competitive. Overall, with heavy competition and scanter offerings in such areas as billing software, interactive media, and content delivery, VeriSign's profitability has been pressured and unpredictable. Were the new CEO to pull out of such markets, the company would gain both cash from the segment sales and increased profitability from pushing company resources into the segments that are most reliable.

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[edit] References