VeriSign Dips Despite Narrower Loss - TheStreet

Updated from Oct. 23

Shares of

VeriSign

(VRSN) - Get Report

were dropping Friday, the day after the network security company reported a narrower loss on dropping revenue.

In recent trading, VeriSign was down 63 cents, or 4.6%, to $14.

First Albany cut its rating on VeriSign to hold from buy and lowered its estimates. The downgrade was based on valuation, with First Albany saying VeriSign has performed an admirable turnaround, but that its shares are now fairly priced. First Albany has done banking recently for VeriSign.

Despite plunging revenue, VeriSign slashed its per-share loss by 62% in the third quarter.

The company lost $30.7 million, or 13 cents a share, in its just-completed quarter. In the year-ago quarter, VeriSign lost $79.7 million, or 34 cents a share.

Although the company's bottom line improved, its revenue dropped 11% from the third quarter a year ago, to $268.1 million.

On a pro forma basis, which excludes various one-time and noncash charges, VeriSign would have earned $48 million, or 20 cents a share. On a fully taxed basis, VeriSign's pro forma profit would have been 15 cents a share.

That result bested Wall Street expectations. Analysts polled by Thomson First Call were expecting VeriSign to earn 14 cents a share on $266.4 million in sales in the third quarter.

The company expects to complete the sale of a majority stake in its Network Solutions unit sometime in the current quarter. Assuming that sale isn't completed until the end of the quarter, VeriSign expects to earn 15 cents a share on a pro forma basis on $268 million in sales in the fourth quarter. If the sale is completed one month into the quarter, the company expects to earn about 13 cents a share excluding charges on $240 million in revenue

While the earnings guidance is in line with Wall Street's estimates, the revenue projection fell short. Analysts have projected that the company will earn 15 cents a share on sales of $270.29 million in its current quarter.

The company's Internet Services Group accounted for about 40% of VeriSign's revenue in the quarter, about the same level as in the second quarter. Revenue from the company's telecommunication services division comprised about 39% of total revenue, up 1 percentage point from the second quarter.

Network Solutions accounted for about 21% of total sales, down 1 percentage point from the second quarter. VeriSign

announced last week that it plans to sell 85% of its stake in the domain registration company to Pivotal Private Equity for $60 million in cash and a $40 million senior subordinated note.

VeriSign was able to decrease its net loss largely through a turnaround in non-operating expenses. Last year, the company recorded a $51.2 million non-operating charge. This year, the company posted non-operating income of $2.1 million.

To be sure, the company did cut some top-line and operating costs.

For instance, the company's gross profit margin, which represents the difference between what it charges customers for its services and its direct costs of producing those services, increased 6.2 percentage points from the third quarter last year as a portion of sales to 57.3%.

Meanwhile, the company cut back on its operating expenses. Marketing costs, for instance, dropped 17.7% from the year-ago period to $50 million. General and administrative costs fell 10.8% to $41 million.

But other operating costs actually rose in the quarter. Research and development, for instance, increased 43.8% from the third quarter a year ago to $13.8 million. Amortization and goodwill charges jumped 38.3% to $77.7 million.