Cash­ing in on .com Why it’s worth bet­ting on Verisign, which vir­tu­ally has a mo­nop­oly on the ad­min­is­tra­tion of do­main name reg­istries.

Finweek English Edition - - MARKETPLACE - Edi­to­rial@fin­ is a port­fo­lio man­ager at In­vestec Asset Man­age­ment.

theIn­vestec Global Fran­chise Fund seeks to in­vest in qual­ity com­pa­nies that have strong busi­ness mod­els and man­age­ment teams, gen­er­ate high-qual­ity prof­its that are mostly con­verted into cash to rein­vest back into the busi­ness, and con­sis­tently com­pound share­holder wealth at su­pe­rior rates of re­turn over the long term.

Verisign, which is listed on Nas­daq, is a key hold­ing in the fund for all these rea­sons. Ever won­dered who is re­spon­si­ble for ad­min­is­ter­ing the .com and .net at the end of just about ev­ery web­site? More than likely, you could bet on it be­ing Verisign. The com­pany gen­er­ates the ma­jor­ity of its cash flow from the op­er­a­tion of these reg­istries, which power the nav­i­ga­tion of the in­ter­net, un­der an agree­ment it has with ICANN, the in­ter­net gov­ern­ing body.

In ad­di­tion to the .com and .net do­main names, its top-level do­mains (TLDs) also in­clude .tv, .edu, .gov, . jobs and .cc. The vast ma­jor­ity of do­mains are still un­der the .com or .net TLD, and at last count these to­talled in ex­cess of 130m! In re­turn for mon­i­tor­ing and pro­vid­ing the server in­fra­struc­ture that backs a large por­tion of the in­ter­net, Verisign re­ceives an an­nual fee per TLD that is reg­is­tered.

Verisign then sells these do­mains to a myr­iad of regis­trar com­pa­nies, which in turn are re­spon­si­ble for re­tail­ing the do­mains to out­side par­ties – com­pa­nies, in­di­vid­u­als and other or­gan­i­sa­tions – who wish to set up a web­site.

The com­pany op­er­ates as a quasi-mo­nop­oly, given that it con­trols, al­lo­cates and ad­min­is­ters the most widely used TLDs in the world – by a fac­tor of many. It is highly un­likely that any other com­pany could make a strong com­pet­i­tive case for be­ing awarded the con­tract it has with ICANN. Be­sides the as­sump­tion by both par­ties that Verisign will con­tinue to op­er­ate the reg­istries, mov­ing it would not be a sim­ple task and would po­ten­tially jeop­ar­dise the sta­bil­ity of the en­tire in­ter­net – some­thing that ICANN is un­likely to be pre­pared to stom­ach even if the process were a com­pet­i­tive one.

Growth in core .com and .net do­main names is likely to slow go­ing for­ward with the rise of “con­ver­gence” risk (for ex­am­ple, pre­vi­ous cre­ators of web pages grav­i­tat­ing to­wards sim­ply hav­ing a Face­book page) and an in­crease in other TLDs. How­ever, the busi­ness may have some un­tapped pric­ing power that could come into play when the next ICANN agree­ment is con­cluded in 2018. In the pre­vi­ous agree­ment signed in 2012, pric­ing for .com was capped at $7.85 per do­main. Prior to 2012, Verisign could (and did) raise its pric­ing on an an­nual ba­sis.

The com­pany op­er­ates as a quasi-mo­nop­oly, given that it con­trols, al­lo­cates and ad­min­is­ters the most

widely used top-level do­mains in the world – by

a fac­tor of many.

What does the fu­ture hold?

Given the brand value of .com, there is some sig­nif­i­cant pent-up pric­ing power in the event that Verisign is able to ne­go­ti­ate more favourable pric­ing terms in the fu­ture. In the vast ma­jor­ity of cases, $4 per year, for ex­am­ple, would not make much dif­fer­ence at all to the end-cus­tomers’ pur­chase or re­newal de­ci­sion on a .com do­main name, but could rep­re­sent an op­por­tu­nity for Verisign to in­crease its rev­enue base by nearly 50%.

Not­with­stand­ing fu­ture growth chal­lenges, the com­pany has done a re­mark­able job in ex­pand­ing its op­er­at­ing profit mar­gin – firstly through fo­cus­ing the group on its most prof­itable busi­ness (do­main name reg­is­tra­tion) and there­after con­trol­ling costs over a pe­riod of sig­nif­i­cant rev­enue growth.

There is no doubt that Verisign is a high-qual­ity com­pany, but it is also at­trac­tively val­ued. In sum­mary, it is a unique busi­ness with a very ca­pa­ble man­age­ment team op­er­at­ing as a quasi-mo­nop­oly. It boasts a num­ber of at­trac­tive char­ac­ter­is­tics – ex­tremely high re­turns on cap­i­tal, cash gen­er­a­tion in ex­cess of earn­ings, a high level of re­cur­ring in­come com­pris­ing many low value trans­ac­tions and, we be­lieve, a high prob­a­blil­ity of growth over the medium term.

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