Shares of security and domain registry firm VeriSign ( VRSN - Get Report) fell Wednesday after its annual report disclosed long-rumored barter deals. VeriSign shares fell $2.71, or 9.30%, to close at $26.42. Mountain View, Calif.-based VeriSign, which filed its 10-K annual report after the market closed Tuesday, said it received 3.8% of its total revenue, or about $37 million, from reciprocal arrangements, or barter deals, in 2001. Under such arrangements, VeriSign bought goods and services from a company that in turn agreed to buy products or services from VeriSign. The company didn't receive any revenue from such deals in 2000 or 1999. Barter transactions in 2001 included deals with IBM ( IBM - Get Report), Oracle ( ORCL), Phoenix Technologies ( PTEC) and InfoSpace ( INSP), according to Gene Munster, an analyst with U.S. Bancorp Piper Jaffray. Munster, who has an outperform rating on the company, said the number is actually slightly lower than what he had assumed. "The reason the stock negatively reacted is it's the first time it's in print, in black and white, that yes, they have been doing this," Munster said. "The bottom line here is the 10-K is clean," he added. "We never like to see barter, but it's been talked about for such a long time." His firm hasn't done any banking business with VeriSign. Tim Leehealey, an analyst with Wedbush Morgan Securities, said in a note that VeriSign has agreed to buy $30 million of equipment from IBM over the next three years. IBM, meanwhile, will incorporate VeriSign security products into its application servers. As VeriSign moves from a consumer-based to enterprise-focused business, Leehealey said he expects the company to use even more swaps. Leehealey has a buy rating on the stock, and his firm hasn't done any business with VeriSign.
VeriSign, whose domain registry business has suffered a slowdown since 2000, acknowledged in the filing that it will continue to face competitive pressure. The company said prices for domain names have experienced moderate declines and it expects that situation to continue. Munster said he believes this means the company does not intend to return to the $35 retail domain-name price in effect until a cut in January; the price currently sits at $29. In another signal of weakness, VeriSign boosted its provision for doubtful accounts to $26.9 million in 2001, up from $5.8 million in 2000 and $859,000 in 2000. The company also reported that 6.5% of 2001 revenue, or about $64 million, came from customers that had received private funding from VeriSign, including several affiliates. That compares with 2.8% in 2000 and 1.1% in 1999. "Typically in these relationships, under separate agreements, we sell our products and services to a company and, under a separate agreement, participate with other investors in a private equity round financing of the company," VeriSign said in its filing. Investors have raised questions about VeriSign investing in affiliates and then booking revenue from them in a process called "round-tripping." The company also has been hounded by concerns that its growth is being fueled by acquisitions. VeriSign said in its filing that it acquired 11 privately held companies in 2001, in addition to its purchase of H.O. Systems in February 2002 for $350 million and of Illuminet in December 2001 for $1.2 billion. VeriSign issued approximately 939,000 shares of common stock and paid about $151 million in cash for the 11 companies. Leehealey dismissed the significance of the acquisitions and sales disclosures. "The big surprise for me was that investors think there were surprises in there," said Leehealey. "Everything was honestly previously disclosed or in my mind immaterial." The Wedbush Morgan analyst, who had expected affiliate sales on the order of 6%, said he did not believe investing in companies abroad was inappropriate and instead characterized the practice as "fairly conservative. "By investing in affiliates instead of trying to invest directly in these markets, VeriSign is able to gain exposure to the potential upside of the markets in which these companies operate but remain isolated from significant downside," Leehealey said in a note.