VRSN Follow-Up

VRSN reported their quarterly results last night with a brief 30 minute conference call (you could also read the transcript in about half that time).  The remarkable thing about VRSN is really how unremarkable it is. The business is highly focused on managing the .com and .net registry (hoping to add .web in the near future) and keeping costs in line with its slow-ish growth.  The predominantly fixed-cost nature of the registry business has continued to allow VRSN to increase its operating margin through operating leverage.  To be more precise, each new .com or .net does not have a significant variable cost to it, but VRSN’s fixed cost structure can be spread out equally over an increasing number of customers, and therefore operating margins will continue to slowly increase.  

Take these numbers as illustrative of this point.  

VRSN reported revenue of $965m and operating profits of $528m in 2013.  Compare these numbers to the full year 2018 numbers, in which revenue will be around $1.2B and operating profits of $804m.  Breaking this down, revenue increased 24% or $235m over the past 5 years, but operating profits have increased $276m or 52%.  This is a perfect example of a great business gaining operating leverage.

The other great, yet simplistic point, about VRSN is not only is it a great business, but its capital allocation decisions have been excellent over the past 5 years.  

Operating cash flow has totaled $3.2b since 2013 and share buybacks have been $3.8B, with one minor acquisition (.web domain registry) of 131m.  VRSN took on some debt to manage these buybacks, but the debt was manageable given the recurring nature of its business and the debt was tax-advantaged.

In those past 5 years, VRSN’s stock has grown at 20% annualized return.  Combine a great business with great capital allocation skills and as a shareholder you don’t have a lot of work to do.  Just think of all the brain damage that went into a business like Sears over the past 5 years.  

In short, VRSN is a clean, simple and great business with focused managers who are allocating capital in an intelligent manner.  Although I have owned VRSN twice over the past 5 years, it is questionable whether I have added any value trying to buy this great business at a great price and sell at a much higher price.  My efforts at intelligence have surely come at a price.  Keeping this post under 500 words is a step in the right direction.  

Matt Brice is the portfolio manager at The Sova Group and can be reached at matt@thesovagroup.com.

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