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VeriSign Looks Good Long Term

An upgrade and a sales beat for the coming quarter send the Internet infrastructure company higher.
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After freeing itself from the Jamba ringtone business and wrapping up its stock-options investigation,

VeriSign

(VRSN) - Get VeriSign, Inc. Report

looked more appealing to investors, and shares surged in Thursday trading.

Stock in the Internet infrastructure company recently added 8.2%, or $1.95, to $25.85.

The company was also helped by warmer feelings from Wall Street. Stifel Nicolaus analyst Todd Weller upgraded the stock to buy from hold.

"VeriSign tends to be ... this love-hate relationship with the Street," Weller said in an interview. "The Jamba acquisition created love when it was growing, and hate when it imploded. We think we're in a positive turn in the cycle which is marked by margin expansion."

The company's addition of GeoTrust, its expected registry price increases, positive financial impacts from restructuring and focus on improving profitability in its telecommunications business should help drive margin expansion, he said.

Weller does not own shares, and his firm does not have a banking relationship with the company.

For the

fourth quarter, VeriSign's sales were short of expectations at $412.6 million, up from $389.1 million in the comparable period in 2005 but below the $417.1 million consensus estimate.

The outlook for the current quarter is earnings of 22 cents a share, short of the 25 cents anticipated by analysts. The top-line forecast is for $380 million, surpassing analysts' target of $354.2 million.

For the full year, revenue is expected to be $1.55 billion, the company said, vs. the $1.54 billion outlook by analysts. EPS should be between $1.06 and $1.07 for the year, VeriSign said, while analysts' consensus estimate calls for $1.10.

VeriSign said charges related to restating past earnings would be less than $200 million, lower than its

original estimate of $250 million. The restatement should be complete by the end of the first quarter or early in the second quarter.

Despite the weaker-than-expected results, CIBC World Markets' analyst Shaul Eyal said Thursday believes that "the spinoff of Jamba, upcoming restructuring, possible uptick in average sales prices for SSLs (high-assurance SSLs) and domain names (ICANN contract) are encouraging signs and keep us positive on VeriSign shares for the longer term." CIBC makes a market in VeriSign and it does and seeks to do business with the companies it covers.

CEO Stratton Sclavos called 2006 an "exciting transformational year for our company" with the divestiture of Jamba and several acquisitions like Kontiki that should help the company beef up its digital-infrastructure services in the year ahead.

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In addition, the company is shifting its three business units into

two divisions to better address the "any era," Sclavos said. Customers will increasingly rely on the digital infrastructure for anytime, anywhere access using any device.

Sclavos expects the company's DNS (domain name service) and SSL certificates businesses to grow at rates of more than 20% this year.

Albert Lin, an analyst with American Technology Research, says VeriSign's core domain registry business "remains the engine of growth" and is optimistic about its new authentication tokens (endorsed by

Microsoft

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) that enable more secure transactions on the Web.

The tokens "have the potential to be ... a very lucrative business," Lin says. "It follows along the lines of a proven business model, and it doesn't hurt to have the endorsement of Microsoft."

Lin has a hold rating on the shares. He does not own the stock and his firm does not do banking.

Reorganizing VeriSign into two divisions makes sense in the long term because the company has a slew of businesses that are somewhat isolated from one another and not fully integrated into the VeriSign sales strategy, says Scott Kessler, an analyst with Standard & Poor's, who upgraded the company from strong sell to sell Thursday.

Still, the company will have to spend time retraining the sales staff to sell the whole set of products and services.

"It will take some time before the plan will have a chance to deliver results. This isn't like

The Office

where you're selling paper products," Kessler says.

Kessler also believes that the enthusiasm for the stock after the expected renewal of its dot-com registry contract -- the stock

jumped more than 7% that day -- "implied a greater positive impact for the company than the math would bear out."

The company's significant exposure to the communications market may also contribute to some weakness going forward, he says. He does not own VeriSign shares and his firm does not do banking.