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VeriSign investors cheer, analysts debate

Shares surge after the Internet company tops estimates in the first quarter and says it's comfortable with Wall Street's projections for 2001.

Shares of VeriSign surged Friday after the company topped estimates in the first quarter and said it was comfortable with Wall Street's projections for 2001.

Although investors drove shares of the Mountain View, Calif.-based company up $5.53 to $51.75, or 14 percent in morning trading, analysts split hairs over numbers that showed its domain-name registration business may be slowing. By midday, the stock was up $4.07, or almost 9 percent, to $50.29.

VeriSign makes software for digital authentication used to encrypt data and protect transactions over the Internet. Through the March 2000 acquisition of Network Solutions, VeriSign is also the dominant Internet domain-name registrar.

When VeriSign bought Network Solutions, the company was criticized for paying a hefty premium. But it appears the deal has paid off--65 percent of this quarter's revenue came from the Network Solutions business. "They only gave away 40 percent of their stock--that's good math," said Mark Fernandes of Merrill Lynch.

In its first-quarter report Thursday night, VeriSign reported revenue of $213.4 million, 8 percent above last year's number and slightly above most analysts' estimates. The company also said it was maintaining its outlook for fiscal 2001--revenue of around $995 million and earnings of 58 cents to 59 cents a share.

There was some initial confusion about the VeriSign results. The company reported earnings of 23 cents a share, implying it would have beat First Call's estimate of 13 cents by a dime, but that figure was on a pretax basis. After taxes, VeriSign brought in 14 cents a share, a penny above the Street's consensus estimate.

Analysts focused on the slightly better-than-expected earnings and noted that the company's results were mixed.

First Union Securities analyst Christopher Russ maintained his "buy" rating but was cautious about a mixed bag of numbers that indicated the company could be seeing declines in some of its divisions.

"Overall metrics were somewhat mixed, but the company is comfortable with previous financial guidance," said Russ. He said the outlook was enough to maintain his rating and leave earnings estimates unchanged. He did, however, lower his revenue estimate to $977 million for the year.

New domain-name registrations were weak, according to the analyst, who noted that multilingual registrations had an especially steep decline year over year. Registrations overall declined to 1 million in the first quarter from 1.9 million in the fourth quarter. Multilingual registrations were only 125,000, vs. 800,000 in the fourth quarter.

"It's possible that (the first quarter) may represent the low-water mark for new registrations given the bursting of the dot-com bubble," said Russ. "However, we don't anticipate a meaningful recovery in registration volumes over the next several quarters."

"Lost market share (and) multilingual domains declined significantly," said Bear Stearns analyst Robert Fagin, who tweaked his estimates slightly lower to reflect the slowdown.

Salomon Smith Barney analyst Chuck Jones maintained his "buy" rating and said domain-name renewals could counter the slowdown in registrations. Jones said the company's deferred revenue increased by $33.4 million, or 7 percent sequentially, ahead of expectations. Renewal rates for people with registered domain names were also ahead of expectations, at about 65 percent.

Fernandes, who reiterated his "buy" rating, said the decline in new registrations shouldn't be a concern. "It's like a telephone company--they don't sign up new customers every day, but they sell new services," he said.

Fernandes looked instead to the average revenue per customer across all business units--a number that increased, indicating the company is adding new services.

The company also evinced confidence in itself and announced Thursday a buyback program that will allow it to buy $350 million of its stock, or around 3.3 percent of shares outstanding.