U.S. government reviewing .com agreement price hikes.
Verisign has a wonderful business model. Running the .com registry has huge efficiencies of scale. As the .com base gets bigger, it throws off more cash.
For years the company and its investors have been able to count on two great upward trajectories: a growing base of .com domains and 7% price hikes in most years.
Although the growth rate of .com is slowing, it isn’t slower growth that has sent the stock down close to 20% today. It’s those 7% price hikes.
Yesterday the company announced that the Department of Commerce, in conjunction with the Department of Justice, is reviewing the .com registry pricing terms in its contract renewal.
Like the last agreement, the renewal would allow Verisign to increase prices 7% per year in four of the next six years.
Since adding additional domains to the .com namespace doesn’t cost VeriSign much, a 7% increase provides similar profit to adding another 7 million domains to the namespace. And when you add in compounding, it’s a pretty sweet deal.
On yesterday’s investment conference call, Gray Powell with Wells Fargo Securities, LLC asked if Verisign’s fat operating margins is leading to these price increases being called into question:
If someone looks at your operating margin, it says you guys have like a 55% operating margin and a very good business and you’re potentially earning too much on the .com contract, what do you say to them to counter that argument?
Verisign CEO James Bidzos gave a rambling answer that basically said the company’s focus on efficient operations is responsible for the fat margins.
The truth is Verisign is overpaid for running .com. Plenty of competent registry providers would run .com for a lot less money.
Verisign will get its renewal, but the U.S. government is right to question the price hikes. They don’t make any sense.
If they are ratcheted down, that would take a big chunk out of Verisign’s financial projections.