VeriSign reported better-than-expected results after the market's close yesterday and raised guidance for 2001. Despite the news, shares are down roughly 7% today. The market's reaction is a good example of the lofty expectations companies carry when priced for perfection. While its long-term prospects remain good, much of the optimism is unfortunately already reflected in the stock price.

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By Mike Trigg (TMF Tonto)
January 25, 2001

Internet infrastructure company VeriSign (Nasdaq: VRSN) reported better than expected results after the market's close yesterday and raised guidance for 2001. VeriSign attributed the results in part to growth in its security business, but the domain registration business disappointed. While it sailed by expectations and remains well-positioned in key markets, the company trades at roughly 130 times next year's earnings, leaving VeriSign with little margin for error.

VeriSign reported fourth-quarter net income of $45.5 million, or $0.21 per share, compared to $4.5 million, or $0.04 per share, in the year-ago period. That beat the Street consensus by a dime. Including amortization and acquisition charges, VeriSign lost $1.3 billion, or $6.64 per share. The pro forma results reflect the ongoing amortization of $17.7 billion in goodwill from the Network Solutions purchase over the next three to four years. Revenue grew 613% year-over-year and 14% sequentially to $197.4 million.

The company's authentication services business -- including digital certificates and public key infrastructure (PKI) services -- continues to drive growth. PKI is a network that allows electronic exchanges to occur safely between authorized parties. It uses digital certificates that authorize communication of encrypted information. In an era where business exchanges are conducted electronically (think e-commerce and e-mail) PKI creates secure and legally binding digital signatures.

Not long ago, I wrote about the explosive demand in the PKI marketplace. According to International Data Corp. (IDC), PKI products and certificate authority (CA) services are expected to grow at a compounded annual growth rate of 61% from $281 million in 1999 to $3 billion in 2004. IDC also stated that roughly two-thirds of total PKI revenue came from products in 1999, but that figure will drop to less than half by 2002 with CA services representing nearly 60% of total revenue by 2004.

Competitive pressures are high and come from PKI product companies like Entrust (Nasdaq: ENTU) and Baltimore Technologies (Nasdaq: BALT), but VeriSign sold over 85,000 certificates in the quarter, representing 135% year-over-year and 13% sequential growth. VeriSign also added over 200 corporate customers for managed PKI services, giving it a full-year total of 800 new customers. With many businesses choosing not to manage a comprehensive security solution, demand for VeriSign's certificates and services remains strong. 

VeriSign's domain registration business disappointed, however, with 4.3 million new names signed up in the quarter. That represents a total of 28.2 million domain names, but was down from 5.1 million last quarter. Confusion often exists over the difference between a registrar and registry. The company's domain registration business (registry) is a directory of Web addresses. On the other hand, its registrar business registers names -- like fool.com -- with the registrant paying for use of that address. VeriSign registered 1.9 million new and renewed 650,000 domain names in the quarter.

VeriSign management now predicts a Q1 profit of $0.13 per share to $0.14 per share, up from the Street's expectation of $0.12 per share. The company still expects revenue of $210 million. For the full year, it forecasts earnings per share of $0.56 to $0.60, on sales of $975 million to $1 billion. The company had been expecting revenue of $960 million to $985 million.

Despite the announcement and new guidance, shares of VeriSign are down roughly 7% today. The market's reaction is a good example of the lofty expectations companies carry when priced for perfection: While its long-term prospects remain good, a great deal of optimism is likely already reflected in the stock price.

(The Motley Fool examines the network security market in Industry Focus 2001.)

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