Investor does a pretty good job explaining how Verisign has a license to print money.
Verisign has a wonderful license to print money.
Its contract with ICANN to run .com allows it to charge $7.85 per .com domain name registered. The company enjoys fat 55% operating margins as a result.
Stephen Pomeroy of Pomeroy Capital Partners, L.P. recently sent a letter to his limited partners about Verisign (of which his fund is a stockholder) and published it on SeekingAlpha.
The crux of the article is that the IANA transition away from the U.S. government will have no affect on Verisign and its contract to run .com. He’s right.
Pomeroy also does a good job explaining the agreement and why it provides a stable future for Verisign.
One point in his letter that I take issue with is the idea that Verisign is hedged against eroding market share from new TLDs:
Additionally, ICANN is in the early stages of introducing a whole slew of new gTLDs possibilities including such “blockbusters” as .today, .ninja, .company, and .tips!11 While much has been made of this new “land-rush” of domains, .ninja hardly seems like a plausible threat to the long establish standard of .com or any of the alternatives already available. Nonetheless, it is always good to be prepared. Accordingly, should any of the new gTLDs prove more popular than anyone expected, VRSN stands to benefit as applicants for approximately 200 of these new gTLDs are already in contract with VRSN to provide back-end registry services.
The problem with these 200 registry contracts is that they’re mostly .brand applicants. They won’t be high volume TLDs, for the most part. Verisign will also make much less per domain registered with these third party TLDs than on a .com registration.
Ultimately, I’d argue there are two levers that investors in Verisign should consider: growth of .com and renewal pricing.
How much more will .com grow? If it stops growing, will it remain basically flat or will it shrink?
On the pricing side, how much will Verisign be able to charge going forward?
As Pomeroy notes, Verisign has a presumptive right of renewal of the .com contract. However, that doesn’t mean Verisign will be able to charge $7.85 forever.
In fact, Verisign stock took a huge (although temporary) hit when it renewed its contract last year. Its previous contract allowed it to increase .com prices 7% per year for four out of the six years of its contract. The new contract requires it to maintain a $7.85 price throughout the term, barring extraordinary circumstances. (I don’t doubt they’ll try to invoke an increase, although their margins might have to shrink first.)
Will the next contract renewal include stable prices? Worse, a decrease? Or will competition from new TLDs mean a more lax contract with the option for price increases?