VeriSign Inc. VRSN reported first-quarter 2017 adjusted earnings of 86 cents a share, in line with the Zacks Consensus Estimate. Earnings increased from 77 cents reported in the year-ago quarter.

Revenues increased 2.4% year over year to $288.6 million and beat the Zacks Consensus Estimate of $286.6 million.

Quarter Details

In the quarter, domain name registrations for .com and .net together grew 1% year over year to 143.6 million. VeriSign processed 9.5 million new domain name registrations for .com and .net, a decrease from 10 million processed in the year-ago quarter.

VeriSign’s renewal rate for the fourth quarter of 2016 was 67.6%, down 570 basis points (bps) year over year. For the reported quarter, the exact renewal rate figures will be available after 45 days from Mar 31, 2017. The company estimates it to be 72.2% compared with 74.4% in the year-ago quarter.

Margins

VeriSign reported non-GAAP operating income of $187.8 million, up 5.2% over the prior-year quarter. The company’s non-GAAP operating margin was 65.1% in the quarter, up from 63.3% in the prior-year quarter.

Non-GAAP adjusted EBITDA was $203.6 million, an increase of 3.9% year over year.

Other Financial Details

Exiting the quarter, the company’s cash and cash equivalents (including marketable securities) were approximately $1.79 billion compared with over $1.80 billion as of Dec 31, 2016.

Operating cash flow in the quarter was approximately $148.2 million, down 0.9% year over year, while free cash flow was $139 million, down 2.8% from the year-ago quarter.

VeriSign repurchased approximately $150 million worth of shares in the quarter. As of Mar 31, 2017, the company had $920 million available under its current share repurchase program.

VeriSign, Inc. Price, Consensus and EPS Surprise

VeriSign, Inc. Price, Consensus and EPS Surprise | VeriSign, Inc. Quote

Guidance

For 2017, VeriSign expects revenues between $1.145 billion and $1.160 billion. Non-GAAP operating margin is now expected within a range of 64.5% to 65.25%.

The Zacks Consensus Estimate for revenues for 2017 is $1.15 billion while that for earnings per share is pegged at $3.58.

Capital expenditure is expected in a range of $35 million to $45 million.

Our Take

VeriSign holds a prime position in the highly regulated .com and .net domain industry. The renewal of the .com contract and price hikes for the .com and .net domain names will continue to drive VeriSign’s top line. Also, we believe that gTLD prospects, international expansion through IDNs and investments in intellectual properties will boost results.

Additionally, VeriSign has significant growth opportunities in the Distributed Denial of Service (DDoS) security market. VeriSign also has significant growth opportunities in the network security products space.

However, the negative impact of search engine adjustments on domain monetization and increasing operating expenses related to marketing remain primary headwinds. We note that VeriSign has underperformed the Zacks categorized Internet Software/Services industry on a year-to-date basis. The company’s shares have increased 16.4% compared with the industry’s gain of 21.7% during the period.

VeriSign carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader tech space are Momo Inc. MOMO, Bazaarvoice, Inc. BV and Ellie Mae, Inc. ELLI. While Momo sports a Zacks Rank #1 (Strong Buy), Bazaarvoice and Ellie Mae carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the trailing four quarters, Momo, Bazaarvoice and Ellie Mae delivered an average positive earnings surprise of 6.99%, 52.58% and 6.39%, respectively.

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