As always, below represents my opinions and should not be construed as financial advise. Always do you own due dilligence. I welcome your feedback of my opinions.

Verisign (VRSN)

· Company Description

o ELI5 the company’s business model

§ VRSN operates 2 of the 13 world’s root servers. Root servers track IP Address with the domain names associated with that IP address. VRSN has been granted a monopoly for .com and .net registrations.

· Company Soundness

o How does the company collect revenue? Does the company have a good or services that is purchased frequently or a regular interval?

§ Recurring. Each year domains must pay to keep their domain associated with its IP address so it can be connected to the internet. These prices are set through ICANN. The current agreement runs through October 2026 and at that point VRSN is allowed to raise prices up 10.26. In January 2020 the price was $7.85. This implies an annual price increase of 4% per year.

§ Revenue is influenced by 3 factors: New registrations, Retention Rates and pricing.

o Do they operate with significant leverage?

§ Yes, VRSN leverages its monopolistic position with a high amount of debt. Currently they operate with more debt than they have assets (negative equity). Having said that their interest coverage is a very reasonable 12x given the steadiness in revenue. While negative equity can indicate a company is insolvent, negative equity here showcases their ability to distribute significant wealth to its shareholders through stock buybacks.

o Is their balance sheet will suited for a downturn and why?

§ Yes, as of their 3Q report they have a credit line outstanding $200 million with none drawn on it. That represents about a quarter and a half of expenses. Given the low customer concentration, the mission critical nature of their service and the nominal cost for businesses, I am comfortable with this LOC.

§ Additionally, they operate with a negative cash conversion cycle (take in cash before expenses occur).

· Can it be Replicated?

o Is their evidence that the company has defended its market position in the past?

§ VRSN has been the backbone of the internet for over 25 years and has contracts in place to 2026. The internet works extremely well, and its fees are nominal. To me this translates into a cemented position. Would it be worth it for a regulator to entertain a competitor that is willing to charge $9 or $8 given things work extremely well? Probably not.

o Is their evidence that market power is growing and that this will lead to strong financials?

§ Yes VRSN’s financials are the envy of virtually any firm. Their average ROA over the past 5 years is a massive 34% with average FCF margins are 60% over the past 5 years and they have virtually no CAPEX.

o What is the competitive advantage?

§ Regulatory Entrenchment. They have smoothly operated as the backbone of the internet for over 25 years. This gives VRSN a unique understanding of the internet’s operations as they are the only player in the space. I feel that it would not be worth the risk for a regulator to move to a different provider.

o Would $10 billion of capital be enough to re-create the company?

§ No. Capital is not the issue for this business. Any company could match IP with domain names. What matters here is relationships to get the contract as well as history of strong services, which they have.

o Are parts of the company not able to be recreated with capital? Which parts and why?

§ Yes what they actually do is extremely easy, but it is only available to one player.

o Are their competitive threats on the horizon?

§ Yes, they potentially could be bypassed from blockchains. Blockchain operates outside the DNS system which is used to match IP addresses with domain names. Should the world move on the blockchain, and we start navigating to Google.eth rather than .com or .net they would be cutout as their service would not be needed. This has a minor potential at this point, but is something important to watch for sure.

· Growth

o Is their a 90% chance that earnings will be up 5 years from now?

§ Yes, revenue has grown literally every quarter over at least the last decade with margins pretty steady at 60% over nearly all TTM periods.

o Is there a 50% chance earnings will continue to grow in excess of 7% per year after the 5 year period?

§ Probably not. Over the last 5 years revenue gains have averaged at 3.1% per year despite a covid bump

· Watch List Decision

o Do you honestly know enough about the industry and company to make an investment decision?

§ I feel I do.

o Bottom Line: Based on your answers is the company well insulated from economic and competitive shocks while able to grow for many years to come?

§ Yes, although growth will be somewhat a challenge

· Valuation

o Value the company

§ They do not pay a dividend.

§ Free cash flow Yields have averaged 3.7% over the past 5 years.

§ Revenue 3 years from now is estimated to be $1.78 billion.

§ With an average FCF margin of 60% over the past 5 years, I believe margin will hold around that level meaning FCF is expected to be $1.068 billion.

§ Over the last 4.25 years shares have been reduced by about 4.25% per year. During this period of buybacks FCF yields ranged between 2.7% and 4.2%. Given that FCF yield is at the higher end of the range I would say they could easily retire 4.2% per year going forward. I will model share buybacks at 3.75% to 4.25% per year

§ Shares Outstanding as of 10/21/22 are 106,016,456. 12/31/25 would be 3.08 years away. This implies shares outstanding 3.08 years from now at 92.74 million and 94.24 million

§ This means forecasted FCF per share is estimated to be between $11.31 and $11.51.

§ If we assume a FCF Yield between 3.5% to 4.5% this implies a Dec 2025 price of $251 to $328.

§ With a current price of $200 this implies a 3-year CAGR between 8.01% to 17.93%

o Would it be a prudent investment to buy the company at current levels?

§ Given the historical steadiness of the company and contract through 2026 along with the low-end expectations of an 8.0% annualized return, I feel that this company represents good value at this time given what I feel is a cemented competitive position.

Sources:

https://www.icann.org/en/announcements/details/icann-and-verisign-announce-proposed-amendment-to-com-registry-agreement-3-1-2020-en Agreement notes

https://investor.verisign.com/static-files/e71134e0-7f79-4fb9-bba9-3c93bbb1e0e8 10-Q

https://investor.verisign.com/static-files/95b1ced1-6ac2-4d94-acab-861f43e72d08 10-K

https://finbox.com/NASDAQGS:VRSN aggregated data