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VeriSign cheered despite hefty net loss

Analysts applaud after the company tops estimates for pro forma earnings, raises its earnings targets for the year and proves it can take an economic punch.

VeriSign's second-quarter pro forma earnings had Wall Street cheering Friday after the company topped estimates, raised its earnings targets for the year and proved it could take an economic punch.

Shares surged 14.69 percent, or $6.93, to close at $54.10 as analysts gushed over VeriSign's operating earnings. Credit Suisse First Boston analyst Todd Raker called VeriSign "a safe haven in the perfect storm."

VeriSign provides security software and registers Internet domain names through its Network Solutions unit. Those two businesses give the company a business built on predictable subscription fees and have enabled the company to weather economic turmoil.

In all the good cheer, analysts dismissed a whopping net loss in the quarter and barely mentioned it in research reports. Nevertheless, the company reported net loss of $11.2 billion for the quarter ended June 30, largely because it took a $9.9 billion charge to write down goodwill related to acquisitions. Many companies that have made stock acquisitions have taken massive charges to account for purchase that have fallen in value. According to generally accepted accounting principles, a company can't carry more goodwill amortization than it's worth.

Goodwill largely accounts for the premium that companies pay to make acquisitions. In accounting, goodwill is any advantage, such as a well-regarded brand name or symbol, that enables a business to earn better profits than its competitors.

VeriSign CEO Stratton Sclavos told that he'd still make those stock acquisitions again because they have exceeded expectations. The Network Solutions acquisition, valued at $21 billion when the deal was announced in March 2000, accounted for 80 percent of the write-off. "We gave up 40 percent of our equity for a company that now provides 60 percent of our revenue," he said, noting the charges don?t affect its cash position. "It was a good deal."

Indeed, VeriSign's results shined excluding the write-off. The company reported operating earnings of 15 cents a share on sales of $231.2 million. Those results excluded stock-based compensation and the write-down of goodwill and intangible assets. The company also said it reported pro forma net income of $52.6 million, or 25 cents a share, excluding the amortization and write-down of goodwill and intangible assets related to acquisitions, stock-based compensation charges and income taxes.

According to First Call, the company was expected to report pro forma earnings of 14 cents a share.

But the earnings weren't the primary focus for analysts. Wall Street was closely watching VeriSign's deferred revenue of $570 million, which was up 5 percent. Deferred revenue, an indicator of future sales, is money a company collects before it actually delivers a product.

Raker said VeriSign's deferred revenue topped his estimates and showed the company can deliver in a tough market. VeriSign ended the quarter with $1.3 billion in cash and no debt.

VeriSign also raised its earnings outlook for the third quarter and 2001. The company predicts it will report earnings of 60 cents to 63 cents a share for 2001, up from First Call's projection of 56 cents to 60 cents a share. Sclavos said the company will give its outlook for 2002 on its third-quarter conference call.

Analysts reiterated their "buy" ratings across the board and increased their earnings targets. "We had forgotten how to say this, but we are raising, yes raising, our EPS number for 2001 and 2002," said Raker.

Merrill Lynch Mark Fernandes said VeriSign did a good job of bringing in renewals on both sides of its business. On the software side, VeriSign had an 87 percent renewal rate for its Web server certificates in the second quarter, on par with the first quarter.

More importantly to Fernandes, VeriSign's Network Solutions business had a 60 percent renewal rate, higher than the company's target of a 50 percent renewal rate. Fernandes said investors had been wary that VeriSign's registrar business would take a hit as dot-com companies struggled or went out of business.

Sclavos said the average annual revenue per customer for its registrar business is $77. For digital certificates, that tally is $670 a year. He added that VeriSign is hoping to boost its revenue per domain-name customer by selling additional services.

Analysts said the company has a significant number of registration renewals up in the second half of the year, giving it an opportunity to sell more services. "Our value-added efforts are just hitting their stride," said Sclavos.