VeriSign Sinks on Name-Dropping and Rumors of a Miss

Shares of VeriSign (VRSN) sank Wednesday, one day before the company was scheduled to report earnings, after one analyst downgraded the stock amid evidence of continued weakness in the domain name business.

Shares of VeriSign fell $3.58, or 16.59%, to close at $18.00.

SoundView analyst Walter Pritchard downgraded the company's rating to buy from strong buy, citing new data from SnapNames, a domain industry infrastructure provider that publishes a monthly count on domain names.

SnapNames reported Tuesday that VeriSign experienced a net loss of 622,269 domain names ending in .com, .net. and .org in March. To make matters worse, compared with past months a greater portion of those names deleted were paid registrants rather than "promotional" names in the .net and .org family that were given away for free.

That means VeriSign's base of registered domain names is shrinking, which doesn't bode well for revenue generated from those registrations, Pritchard explained.

VeriSign's domain name business has been under pressure for months as a result of increased competition from lower-priced rivals and an end to the land grab during the dot-com boom. However, Pritchard and others had expected numbers to remain stable in March compared with February. But with the continued decline in March, Pritchard reduced his estimates on VeriSign and his price target on the company's stock to $27 from $40, reflecting a multiple of 20 times his lowered 2003 earnings estimate.

In his note, Pritchard said he still believes VeriSign will achieve his first-quarter estimates when it reports results after the market closes Thursday. He's forecasting first-quarter earnings of 21 cents a share on a lowered revenue estimate of $339.5 million. The consensus estimate is for VeriSign to earn 20 cents a share on $342.6 million in revenue, according to Thomson Financial/First Call.

But other analysts believe there's more at play than just the March domain name stats. "I think it's trading like it's going to miss," said Wedbush Morgan Securities analyst Tim Leehealey, who has a buy rating on the stock. He said he didn't believe the SnapNames numbers could be entirely responsible for the stock's drop because talk of disappointing March numbers already had been circulating on Wall Street for a few days.

Last week, U.S. Bancorp Piper Jaffray analyst Gene Munster published a note estimating that VeriSign's registrar business supported roughly 10.8 million .com, .net and .org domain names as of April 14, down from his estimate of 11.2 million March 31. Munster, who has an outperform rating on VeriSign, reduced his estimate on domain name sales in the first quarter by $8 million to $98 million, but said he expects revenue from other business lines to make up the difference. His firm has not done banking with VeriSign.

Some analysts believe the weakness may extend beyond VeriSign's domain name business. Leehealey said he believes weak security consulting may also contribute to the company's results missing or coming in light Thursday.

Jordan Klein, an analyst with UBS Warburg, shared that view. He downgraded VeriSign last week to hold from buy based largely on weakness with the company's enterprise security business. He noted that VeriSign sells third-party security products from such companies as RSA Security (RSAS)and Check Point Software(CHKP), which both preannounced weak earnings.

Klein said he had been expecting VeriSign's enterprise and security businesses to contribute to 22% to 25% organic revenue growth excluding acquisitions at VeriSign in 2002. Now he expects VeriSign's organic growth to reach only 15% this year. His firm hasn't done any banking for VeriSign.

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