Updated from Jan. 26Despite beating top- and bottom-line estimates and raising 2005 guidance, VeriSign ( VRSN ) was hammered Thursday due to disappointing sales in the company's new mobile content business. VeriSign shares were recently down $4.09, or 14%, to $25.19 Citigroup Smith Barney analyst Chris DeBiase downgraded his rating on VeriSign Thursday to hold from buy, citing limited earnings upside in 2005. DeBiase said VeriSign's mobile content business, acquired when the company bought German company Jamba! earlier this year, is a solid growth engine, but he doesn't expect it to be strong enough to offset the sales and marketing VeriSign expects to spend on the business. "Earnings leverage in our opinion will not be seen until 2006," DeBiase wrote. While the company's fourth-quarter metrics exceeded most published numbers, DeBiase added, he believes they missed what was "baked" into the stock, which was up 7% going into the company's earnings report Wednesday. Some investors before the earnings release expected the company to exceed the consensus estimate on revenue, for instance, by as much as $30 million, DeBiase wrote. (His firm has done non-investment banking business with VeriSign.) Similarly, the "whisper number" on the Street for VeriSign's Jamba! Business had crept up to more than $100 million, exceeding the $94 million ultimately delivered by the company and the company's guidance of $85 million, analysts said. "It's basically the vicious whisper number biting VeriSign," Piper Jaffray analyst Gene Munster commented late Wednesday of the market's reaction. Munster , who has an outperform rating on VeriSign, said the selloff was unwarranted because the Street had assumed some sales from the U.S. launch of VeriSign's Jamster! mobile content service that didn't materialize. But the division still posted 27% sequential growth. (His firm hasn't done any banking with VeriSign.)
While that sounds impressive, Susquehanna analyst Gregg Moskowitz noted that the growth had slowed from sequentially doubling in the third quarter, when VeriSign launched Jamba! in the U.K. He said he expected Jamba! results to be higher - at $105 million - from more subscriber growth in existing markets and recently raised prices in the U.K. , but that was dampened by flat revenue in Germany . (Moskowitz has a neutral rating on VeriSign and his firm doesn't do investment banking.) Mountain View, Calif.-based VeriSign reported net income of $114.8 million, or 43 cents a share, in the fourth quarter, which ended Dec. 31. That reversed a net loss of $32.3 million, or 13 cents a share, in the same period a year earlier. Excluding charges, VeriSign earned non-GAAP net income of $54.8 million, or 21 cents a share, in the fourth quarter, compared to non-GAAP net income of $40.9 million, or 17 cents a share, a year earlier. Analysts were expecting the company to bring in non-GAAP earnings per share of 20 cents, according to Thomson First Call. VeriSign, which provides infrastructure services for the Internet and telecommunications industry, said revenue rose 41% to $356 million from $251.6 million a year earlier. That exceeded the analyst consensus estimate calling for $350.9 million in sales. Looking forward, VeriSign forecast 2005 revenue to be between $1.5 billion and $1.55 billion, up from a prior range of $1.4 billion to $1.425 billion. That compares to analyst expectations of $1.51 billion in revenue for the year. VeriSign raised its EPS forecast for the year to 90 cents a share -- consistent with the consensus estimate but higher than its previous forecasted range of 84 cents to 85 cents a share. In the first quarter, VeriSign expects to earn 21 cents a share on $370 million in revenue, including $157 million from its Internet Services Group and $213 from its Communications Services Group. Analyst estimates last called for VeriSign to earn 21 cents a share on $359.5 million in the first quarter.
In the fourth quarter, VeriSign's Communications Services Group, which provides services to the telecom industry, delivered revenue of $204 million, including the $94 million from Jamba! Jamba!, acquired by VeriSign in May, provides wireless content including ring tones to carriers, who then offer them to their subscribers, primarily in Europe. Both analysts and VeriSign are banking on big growth from the Jamba! business. Analysts have projected the Jamba! business and the similar, recently launched Jamster! mobile content service in the U.S. could generate between $450 million and $500 million. VeriSign's Internet Services Group, including the security and the naming and directory services, posted $152 million in sales in the fourth quarter. VeriSign, which administers the registry of Internet domain names ending in .com and .net, projected the active base of those names will surpass 40 million for the first time during the first quarter.