VRSN - Verisign

[ItsAValueTrap]

Versign can be seen as a toll bridge on the growth of the Internet and currently trades at a PE of less than 15.

 

Verisign's crown jewel is its .com registry business.  It receives $7.85/year for every .com domain registered with it.  As the number of .com domains slowly increases, Verisign's earnings will grow.  It earnings should see some organic growth without much additional capital involved.  This is a wonderful monopoly with extremely high margins.  However, its monopoly depends on ICANN renewing its contract after a competitive bidding process.  As the incumbent, Verisign has a small advantage because staying with Verisign minimizes any disruptions to the domain name system.

 

Oddly enough, lowering .com prices could be detrimental to legitimate buyers of Internet domains.  Many individuals will speculate on domain names and buy up domain names that other people may want to buy.  They will then turn around and try to sell the domain name for hundreds of dollars.  While they wait for prospective buyers, they often put advertising on their website and/or engage in activities to game search engine results.  This hurts legitimate domain name buyers, who may have to pay hundreds of dollars for the domain name that they want.  This hurts anybody who uses search engines due to search engine spam.  This type of parasitic behaviour will increase if registration costs come down.  Weirdly enough, lowering domain prices too much may actually increase the total costs to Internet users.

 

Allowing domain registries to make highly unusual profits may actually be a good thing for the Internet.  The costs of a domain registration remain insignificant compared to the total cost of a website (web design, web hosting, domain registration, etc.).  It removes problems associated with cheap domain registration (web spam, domain camping, etc.).  Historically, ICANN has allowed many domain registries to increase their prices.  This does not seem to have been detrimental to Internet users.

 

Verisign shows up in Berkshire's 13-F.

 

Risks

 

If Google and other search engines get better at fighting web spam, people who camp on domain names will make less money and register fewer domain names.  In such a scenario, it might make sense for ICANN to push for lower domain registration fees.  Domain camping may still occur because legitimate buyers of domain names may still be willing to pay hundreds of dollars (if not more) for a desirable domain name.  Technology will never change that demand.

 

New generic top level domains are coming out.  There will be new domain extensions such as .xyz, .ninja, .nyc, etc. etc.  This may reduce the demand for Verisign's .com domain and other extensions (.net, .tv, etc.).

 

Links

 

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/28265 - VIC writeup

 

What Verisign's New Contract With ICANN Means For Domain Name Rates

 

*Disclosure:  No position and no intention of owning this.  But I figured it would be good to have a thread on it because Berkshire owns it.

[wbr]

Similar business, bigger opportunity?

 

http://buysidenotes.com/2014/07/28/demand-media-dmd-the-times-they-are-a-changin/

[ItsAValueTrap]

Here are my notes on Demand Media and Rightside:

http://glennchan.wordpress.com/2014/07/29/notes-on-demand-media-and-rightside/

 

Demand Media engaged in the gaming of search engines that is good for Verisign.  They don't do that anymore because Google is better at fighting webspam.

 

I'm not a fan of the new gTLDs, though there may be a minority of people who make almost all of the money.  I don't think Rightside will be in that minority... but who knows.  (Tech is hard.)

[Guest Schwab711]

IMO, the monopoly for Verisign only exists because .com is a household word. If more domains catch on then profits will drastically decrease due to competition. Verisign's monopoly seems safe moving forward and I really like this stock. I think I still prefer cash/waiting to buying it (however it is close).

[wbr]

IMO, the monopoly for Verisign only exists because .com is a household word. If more domains catch on then profits will drastically decrease due to competition. Verisign's monopoly seems safe moving forward and I really like this stock. I think I still prefer cash/waiting to buying it (however it is close).

 

Every top level domain is a monopoly. Rightside owns the rights to .social, that means they are the only registry business giving out this gTLD. Companies are at least going to register every gTLD that remotely relates to what they are offering (facebook.social, facebook.friends...) if not every single one - just to have control over it. The costs for doing so are neglible, so they will probably just do it.

 

Referring to Valuetrap's blogpost I have to add a couple of things:

 

One important aspect is flexible pricing. There is no cap for the gTLDs, so price might go up quite a bit, especially for more popular ones. But people will still pay the price, because the individual costs are so small.

Also in your revenue calculation you looked at one single gTLD, but Rightside already owns the rights for almost 30 and additional ones will certainly be added. In aggregate they already registered more than 60k domains in the last 90 days

 

http://ntldstats.com/registry/United-TLD-Holdco-Ltd

 

At the end of 2014 they might have your 150k which would match the guidance for registry revenue in the low single digits. However we are still in the early stages of the S curve. Public attention can cause extremely fast revenue growth in the midterm.

I am willing to make that bet with a smaller position.

 

 

[yadayada]

you buy rightside then? Seems like they came down quite a bit in price after the spin off already. What is cost structure or operating leverage like for those gLTD names?

[wbr]

you buy rightside then? Seems like they came down quite a bit in price after the spin off already. What is cost structure or operating leverage like for those gLTD names?

 

Sry for the late answer.

 

Yes I bought an initial position of Rightside.

 

New gTLDs have costs associated to their application and annual maintenance. Total cost of about 500k to get a gTLD going, 185k are application fees to ICANN. The application fees are capitalized and written off over time (p. 84 http://www.sec.gov/Archives/edgar/data/1589094/000104746914006178/a2220759zex-99_1.htm#mu10201_selected_historical_combined_financial_data). Those investments were $18.2 million in 2012 and $3.9 million in 2013. Other expenses were $8.4 million in 2013 and $2.3 million in Q1 of 2014. They expect these investments to continue in the near future. It makes the company look quite bad, because profits/cashflows of the registrar business (eNom and Name.com) are eaten up by these investments (p. 103). In 2011 OCF was $32 million and capex seems to be about $9 million. That looks pretty good to me. In 2012 there was the acquisition of Name.com and the ramp-up in investing activities for the gTLDs which brought cashflow from investment activites to $-45 million.

 

Maintenance is about 200k per gTLD per year. Number of domains needed depends on the mix of Rightside registrars/3rd party registrars(https://www.dropbox.com/s/ogvx6recaef7ipo/Rightside%20Investor%20Presentation%20-%20July%202014.pdf) and ofc the price. I would assume that some gTLDs will fetch a lot higher prices than others.

[ni-co]

Thanks, ItsAValueTrap.

 

I also had a look at it recently because of Ted & Todd's latest filing. I've come to the conclusion that I don't really understand what they're seeing. A 15 p/e would be a great price for a monopoly company, except that it isn't a real monopoly company. Every few years they are under this existential threat of not being allowed to go on with the .com business. And the competitive bidding process every few years will also take its toll on the "monopoly" profits. The rest of their business is in a highly competitive environment.

 

So, I guess my problem is that I can't really see where Verisign is going to be 10-15 years from now, whereas I can totally see where DVA or LBTYA are heading, for example.

 

Maybe I'm overlooking something important here, but as of today I'm not convinced of this T&T pick.

[yadayada]

you buy rightside then? Seems like they came down quite a bit in price after the spin off already. What is cost structure or operating leverage like for those gLTD names?

 

Sry for the late answer.

 

Yes I bought an initial position of Rightside.

 

New gTLDs have costs associated to their application and annual maintenance. Total cost of about 500k to get a gTLD going, 185k are application fees to ICANN. The application fees are capitalized and written off over time (p. 84 http://www.sec.gov/Archives/edgar/data/1589094/000104746914006178/a2220759zex-99_1.htm#mu10201_selected_historical_combined_financial_data). Those investments were $18.2 million in 2012 and $3.9 million in 2013. Other expenses were $8.4 million in 2013 and $2.3 million in Q1 of 2014. They expect these investments to continue in the near future. It makes the company look quite bad, because profits/cashflows of the registrar business (eNom and Name.com) are eaten up by these investments (p. 103). In 2011 OCF was $32 million and capex seems to be about $9 million. That looks pretty good to me. In 2012 there was the acquisition of Name.com and the ramp-up in investing activities for the gTLDs which brought cashflow from investment activites to $-45 million.

 

Maintenance is about 200k per gTLD per year. Number of domains needed depends on the mix of Rightside registrars/3rd party registrars(https://www.dropbox.com/s/ogvx6recaef7ipo/Rightside%20Investor%20Presentation%20-%20July%202014.pdf) and ofc the price. I would assume that some gTLDs will fetch a lot higher prices than others.

 

thanks for the response. I assume that basicly on a certain gLTD they only really pay maintenance fees then? And amortization of these gTLD's are basicly imaginary and can be discounted? Looks to me like a lottery ticket. Given how names like .xxx performed it seems there is a decent cchance then.

[ItsAValueTrap]

There are a bunch of things they have to pay for such as legal fees.

 

For example, maybe somebody registered thepiratebay.org with you.  Rights owners file a lawsuit in the US alleging that the site helps people pirate software and do other illegal things.  They want the domain taken down.  So that's something you have to deal with.

 

Then you have copyright disputes.

 

And then you have people who had their domain stolen due to somebody hacking into one of their accounts.  To some degree you have to deal with customer service.

 

And amortization of these gTLD's are basicly imaginary and can be discounted?

I think ICANN might step in and give the domain registry to somebody else if there are major problems going on.  (???)  I actually don't know though.

 

But I don't think the companies registering the gTLDs own them forever.  So I think the amortization makes sense.

[yadayada]

http://www.valuewalk.com/wp-content/uploads/2014/05/Demand1.pdf

 

Interesting write up

[Guest Schwab711]

The point I made about .com's monopoly status earlier can be picture as a highway toll network as others have mentioned. If there are many direct routes with toll's setup then each toll becomes a price taker as opposed to one or two routes between two popular locations that are price makers. The subject qualitative-side of investing is tough to convince when it comes down to the same types of debates as big vs little hall of fame supporters (assuming you are familiar with baseball hof voting issues). I am fairly conservative with my 'economic moat' or competitive advantage designations. I would like to think I will only make them when I am extremely confident (say 80% probably of true outcome meeting or exceeding my base projections - however arbitrary that example it gives you an idea) in my medium and long-term thesis of the company. I can't think of a proper real historical industry evolution example that would be a strong comparison but I personally believe that too much is being made of new gLTDs replacing the legacy domains. However, I also think that even if the newer gLTDs caught on they would eventually have to be sold for nearly free since there would be no reason to demand any one of the new gLTDs in particular if the domain name choices were infinite in combination (similar to the site name). You would no longer be dealing with the same business model or industry market conditions so assuming each of those to be consistent with a significantly high market share for the newer gLTDs destroys the credibility of any valuation of the stock using those assumptions.

 

In short, Verisign (VRSN) is definitely the way to play this industry and they are cheap in my opinion.

[wbr]

http://www.thedomains.com/2014/08/25/55000-a-year-for-a-domain-registration-wecolme-to-attorney-lawyer/

[Guest notorious546]

has anyone revisited this lately?

 

I stumbled on John's write up and enjoyed it. I like the business model and capital allocation to date. Not familiar enough with the business to comment much more. Will post as i have more conviction.

 

http://sabercapitalmgt.com/wp-content/uploads/2013/03/Verisign-2016-09-02-1.pdf

[rtvinvest]

has anyone revisited this lately?

 

I stumbled on John's write up and enjoyed it. I like the business model and capital allocation to date. Not familiar enough with the business to comment much more. Will post as i have more conviction.

 

http://sabercapitalmgt.com/wp-content/uploads/2013/03/Verisign-2016-09-02-1.pdf

 

Have done some work on it so might be able to help if you have questions :)

[Guest notorious546]

What's the latest update on the ICANN regulations? What likelihood do you think they will be able to renew the agreement?

 

Do you see much risk to future growth as company's may shift to sites ending in different urls. ie) .co .app .etc?

 

On my rough math 7-8% FCF, reasonably good capital allocation, moat if they can renew the agreement.

 

What don't you like about the business/management/history of the business?

[Liberty]

What value does VRSN provide to its customers? Genuine question. I looked at the company years ago, but don't remember much, and recently saw the John Huber piece while reading the Saber Capital letter so I put it aside to read later (maybe he answers all my questions). But I guess my first worry would be that this is a business with a regulatory moat (which can in theory be taken away by the same regulatory) that extracts more value from its customers than it provides.

 

Couldn't anyone else offer the same service for a lower price if they got regulatory approval and just accepted lower margins? Why are customers paying for these huge margins? Is it a historical accident that Verisign got monopoly on these top level domains, and is it likely to be changed at some point? What do they do that makes them special apart from having this government license?

 

Thanks, and sorry if my questions have obvious answers.

[Peregrine]

What value does VRSN provide to its customers? Genuine question. I looked at the company years ago, but don't remember much, and recently saw the John Huber piece while reading the Saber Capital letter so I put it aside to read later (maybe he answers all my questions). But I guess my first worry would be that this is a business with a regulatory moat (which can in theory be taken away by the same regulatory) that extracts more value from its customers than it provides.

 

Couldn't anyone else offer the same service for a lower price if they got regulatory approval and just accepted lower margins? Why are customers paying for these huge margins? Is it a historical accident that Verisign got monopoly on these top level domains, and is it likely to be changed at some point? What do they do that makes them special apart from having this government license?

 

Thanks, and sorry if my questions have obvious answers.

 

You need the infrastructure put in place to manage the registry. In fact, plenty of other TLD registries use Verisign as the back-end registry.

 

But basically yes, they have a favored position.

[Liberty]

You need the infrastructure put in place to manage the registry. In fact, plenty of other TLD registries use Verisign as the back-end registry.

 

But basically yes, they have a favored position.

 

Indeed, I'm not saying that they aren't doing anything. I just meant that they don't seem to be doing something that another competent tech company couldn't do at half or a quarter (or less) of the margins if not for the regulatory situation.

[dwy000]

What value does VRSN provide to its customers? Genuine question. I looked at the company years ago, but don't remember much, and recently saw the John Huber piece while reading the Saber Capital letter so I put it aside to read later (maybe he answers all my questions). But I guess my first worry would be that this is a business with a regulatory moat (which can in theory be taken away by the same regulatory) that extracts more value from its customers than it provides.

 

Couldn't anyone else offer the same service for a lower price if they got regulatory approval and just accepted lower margins? Why are customers paying for these huge margins? Is it a historical accident that Verisign got monopoly on these top level domains, and is it likely to be changed at some point? What do they do that makes them special apart from having this government license?

 

Thanks, and sorry if my questions have obvious answers.

 

You need the infrastructure put in place to manage the registry. In fact, plenty of other TLD registries use Verisign as the back-end registry.

 

But basically yes, they have a favored position.

 

I think it goes deeper than a favored position.  There can really only be one registry at the end of the day.  They provide the matching for domains and IP addresses on all the ".com" addresses.  It would be counterproductive to have multiple entities doing this - and not even sure if logistically it would be possible without having those multiple entities coordinating changes and new domains between them.  This is ultimately the role VeriSign plays as you can get a .com domain from a number of approved registrars (eg GoDaddy) but they consolidate and combine at the VeriSign level - and you need somebody playing that role.

 

With the introduction of new top level domains ".whatever", other entities can act as the VeriSign equivalent but for each of those there can really only be one top registry.

 

I think what you're really betting on here is the growth in .com and .net websites (and others that VeriSign now runs) as well as the stickiness and difficulty in changing from VeriSign to someone new by ICANN.  From that perspective I'm of the belief that VeriSign will own this forever (as long as they don't do stupid things).  The risk to the entire internet of changing over to a new provider will massively exceed the value of somebody bidding a couple of pennies below on price.  I can't imagine anyone  investing to build the infrastructure (the security costs alone would be massive) if they were subject to being displaced themselves in a couple of years.

 

The real risk in my view is the price approved/negotiated by ICANN.  That I'm guessing will end up being fixed pretty close to today's price (+/- inflation) for the foreseeable future. 

 

Given the fixed price and limited top line growth (with domain growth is slowing) this is becomes more of a bond than a stock and will likely move in line with interest rates as opposed to anything else.  In the meantime they are good at cost control and capital allocation (all FCF goes to buy back stock).

 

The funky converts provide tax savings and they have some NOL's which means cash flow exceeds net income by a good amount.  That convert will be an issue in about 15 years when it matures.

[Guest Schwab711]

I think what Liberty is trying to ask is why is VRSN so special? Basically, is there a concern that VRSN could lose the contract altogether like Neustar (NEU) did with their NAPM contract? Why or why not? NEU had similarly high margins and was the database administrator of NAPM for 10 or 15 years prior to losing the contract to Ericsson.

 

Yes there is infrastructure, but others can do that. Yes, other people currently use VRSN's back-end, but others would do that if they had the .com contract.

[dwy000]

I think what Liberty is trying to ask is why is VRSN so special? Basically, is there a concern that VRSN could lose the contract altogether like Neustar (NEU) did with their NAPM contract? Why or why not? NEU had similarly high margins and was the database administrator of NAPM for 10 or 15 years prior to losing the contract to Ericsson.

 

Yes there is infrastructure, but others can do that. Yes, other people currently use VRSN's back-end, but others would do that if they had the .com contract.

 

Good point.  You're right, others could probably build the infrastructure, meet the ICANN requirements and win the contract.  I guess the question is a) what is the cost to build the infrastructure and do all of that (esp. if VeriSign could just match your price with existing infrastructure); and b) what is the add'l price ICANN is willing to accept to avoid the risk of switching.  If the prices out there were starting to choke the system I would suspect the desire from both sides would be higher.  But an $8 annual fee for a domain (and that hasn't changed for years and may not going forward) doesn't feel like an impediment to the system, especially vs. the risk of changing.  Others may disagree.

[Liberty]

I understand that there can only be one .com or .net registrar at a time. But why does it have to be VRSN?

 

Right now it's them by default because they're already there and doing a good job, and they were lucky enough to be there at the start. But unlike a water utility, which is a natural monopoly that is incredibly sticky because you won't dig and lay pipes again, if at some point VRSN does something stupid, or the politics ruling ICANN change, or whatever, it would be fairly straightforward to replace them with another competent tech company, and what would VRSN stock be worth then?

 

I'm not saying this is likely, I'm just wondering out loud of there's more to the moat than a regulation.

[oddballstocks]

What value does VRSN provide to its customers? Genuine question. I looked at the company years ago, but don't remember much, and recently saw the John Huber piece while reading the Saber Capital letter so I put it aside to read later (maybe he answers all my questions). But I guess my first worry would be that this is a business with a regulatory moat (which can in theory be taken away by the same regulatory) that extracts more value from its customers than it provides.

 

Couldn't anyone else offer the same service for a lower price if they got regulatory approval and just accepted lower margins? Why are customers paying for these huge margins? Is it a historical accident that Verisign got monopoly on these top level domains, and is it likely to be changed at some point? What do they do that makes them special apart from having this government license?

 

Thanks, and sorry if my questions have obvious answers.

 

You need the infrastructure put in place to manage the registry. In fact, plenty of other TLD registries use Verisign as the back-end registry.

 

But basically yes, they have a favored position.

 

I think it goes deeper than a favored position.  There can really only be one registry at the end of the day.  They provide the matching for domains and IP addresses on all the ".com" addresses.  It would be counterproductive to have multiple entities doing this - and not even sure if logistically it would be possible without having those multiple entities coordinating changes and new domains between them.  This is ultimately the role VeriSign plays as you can get a .com domain from a number of approved registrars (eg GoDaddy) but they consolidate and combine at the VeriSign level - and you need somebody playing that role.

 

With the introduction of new top level domains ".whatever", other entities can act as the VeriSign equivalent but for each of those there can really only be one top registry.

 

I think what you're really betting on here is the growth in .com and .net websites (and others that VeriSign now runs) as well as the stickiness and difficulty in changing from VeriSign to someone new by ICANN.  From that perspective I'm of the belief that VeriSign will own this forever (as long as they don't do stupid things).  The risk to the entire internet of changing over to a new provider will massively exceed the value of somebody bidding a couple of pennies below on price.  I can't imagine anyone  investing to build the infrastructure (the security costs alone would be massive) if they were subject to being displaced themselves in a couple of years.

 

The real risk in my view is the price approved/negotiated by ICANN.  That I'm guessing will end up being fixed pretty close to today's price (+/- inflation) for the foreseeable future. 

 

Given the fixed price and limited top line growth (with domain growth is slowing) this is becomes more of a bond than a stock and will likely move in line with interest rates as opposed to anything else.  In the meantime they are good at cost control and capital allocation (all FCF goes to buy back stock).

 

The funky converts provide tax savings and they have some NOL's which means cash flow exceeds net income by a good amount.  That convert will be an issue in about 15 years when it matures.

 

I think you grossly misunderstand how DNS works.  It's a distributed system, each DNS server keeps its own set of lookups for an IP address and domain.  There are authoritative name servers that handle the resolution, but it's still distributed.  A domain name when purchased is just that, it's a simple name.  You need to supply the name servers and the final destination.  I can change the IP addresses of my URL's hourly if I want and the changes would never touch Verisign.  The changes would impact my nameserver and the propagate out to other nameservers.

 

There isn't one single server with this giant library of IPs/domains.  The distributed nature is why the internet works when nodes go down.  It opens issues, you can have DNS poisoning where someone replaces a valid address with a fake one.  A DNS poisoning attack would redirect users from Facebook.com to a malware site or something similar.  But only users on that DNS server, the rest of the internet would be fine.

 

I've bought domains, Verisign provides zero value as a customer.  They sell overpriced SSL certs.  I can't imagine why I would ever purchase anything from them.

[LC]

 

I've bought domains, Verisign provides zero value as a customer.  They sell overpriced SSL certs.  I can't imagine why I would ever purchase anything from them.

 

Bingo.