VeriSign's Name Game Losses Come a Little Slower

VeriSign's(VRSN Quote) domain name business continued to falter in May, but its decline has started showing signs of slowing, according to an industry report released last week.

VeriSign recorded a net loss of 484,847 domain names ending in .com, .org and .net in May, the latest month figures available from SnapNames. The research firm released its latest domain name count report, "State of the Domain," last week.

VeriSign's drop in domain names in May was almost half of the 903,953 names lost by VeriSign in April.

In the overall domain name market, there were 167,590 fewer names in May than in April. That means when VeriSign's loss is subtracted, all other registrars actually collectively gained more than 300,000 registrations, according to SnapNames.

"It may not give current investors a tremendous amount of comfort because the numbers coming out are still pretty substantial, especially when compared to the industry as a whole," said Jordan Klein, an analyst with UBS Warburg, who has a hold rating on VeriSign. His firm hasn't done any banking business with VeriSign.

Shares of VeriSign have shed about 85% of their value since the beginning of the year as the company has deleted promotional names initially given away for free and speculative names from its registry that were not renewed. But some customers also have switched to rivals such as Tucows(TCOW.OB Quote), eNom and GoDaddy, who together reported an increase of 213,494 names in May.

VeriSign first began deleting its promotional names -- including names ending in .net and .org given away when a customer bought a similar .com name -- and speculative names in the fourth quarter of 2001. SnapNames predicted that VeriSign's purge would wind down through the second and third quarters before ending completely.

Deleting those names is not all bad news for VeriSign, though. Klein said it's important to remember that if VeriSign does delete some speculative names and is able to hold onto a stable base of renewing customers, the company still will be able to generate strong cash flow because it charges higher prices than many competitors and therefore enjoys higher margins.

VeriSign has said it expects its total domain name registry to bottom at between 9 million to 10 million names by the end of June. SnapNames reported VeriSign's registry of .com, .net and .org names fell to 9.6 million in May from 10.1 million in April.

Tim Leehealey, an analyst at Wedbush Morgan Securities, figures VeriSign's registry includes about 10.5 million names because the SnapNames count excludes some names. The number of names lost by VeriSign in May was higher than he expected but not a big surprise given that the company already forecast a decline.

"I think this is just a function of the fact that VeriSign had 100% of market share and it now has 20% of all new domain names added," said Leehealey, referring to the monopoly enjoyed by VeriSign's predecessor Network Solutions before the market was opened up to competition. Leehealey has a hold rating on VeriSign, and his firm hasn't done any banking with the company.