Is VeriSign Ready To Grow?

There have been some significant changes recently at troubled company VeriSign (Nasdaq: VRSN). CEO Stratton Sclavos abruptly resigned after a 12-year reign just after Memorial Day. He was a polarizing figure, with many in the I-won't-touch-the-stock-as-long-as-he's-there camp. OK, we got the message, as did the Street. The stock is up almost $6 since his departure. 

This company is the utility and the toll booth of the Internet. It registers and "keeps" .com and .net addresses for $6 per address, per year ($3.50 for .net domains). In fact, these rates are set to rise to $6.42 and $3.85 in October. With the Department of Commerce granting it exclusive registry status through 2012, with preemptive rights for renewal, it's a locked and loaded situation.

We must protect this house
VeriSign is also a leader in website digital certificates. This is the stuff that secures any online transaction through encryption technology. It's another cash cow, because certificates are priced per server, per year. Certificates range from $399 to $699 per year, per server. High margins and repeat business are music to an accountant's -- and a shareholder's -- ears. 

VeriSign has a lot of other business lines -- some profitable, some costly. The payment systems business is plodding along, but the new CEO could sell it for a tidy profit. VeriSign is a leader in SSL service -- handing off cell-phone communications from one network to another, seamlessly. VeriSign collects a very nominal fee for such secure hand-offs. 

The new CEO, William Roper, is age 60 and has a strong accounting background. I think he's going to make this baby lean and mean, sell off any non-strategic assets, and increase the profits. The stories circulating about Roper are that he is about profits -- profits now. VeriSign's core businesses should generate operating margins of 25% or more because the .com and .net registry operates with very high gross and operating margins. Website digital certificates carry the same scenario.

Growth and cash flow
Many analysts and portfolio managers are warming up to the VeriSign name with new management in place. Of course, some rumors say that with the departure of Mr. Sclavos, the company will be sold to a private equity concern. With a revenue base of $1.5 billion and core businesses growing, the cash flow would more than cover any debt incurred by a private equity buyout.

VeriSign has the best of both worlds: a friendly government agency granting it the exclusive registry and high-gross-margin lines of business. VeriSign's stock is at $33, a 52-week high, but the best is possibly yet to come. Based on my nine years of experience following the company, I expect earnings to be $1.40 to $1.50 per share for 2008 and $1.80 to $1.90 for 2009, and believe that the new CEO will increase margins and unleash the true growth potential of the company. If these things pan out, the stock price could grow to $45 over the next nine to 12 months.

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Fool contributor Georges Yared can be reached at geoyared@gmail.com. Georges does not own any shares in VeriSign. The Fool has a disclosure policy.