VeriSign's News Corp. Deal Signifies Renewed Focus - But Big Challenges Remain

VeriSign's (VRSN) decision to sell a majority stake in its Jamba! unit to News Corporation (NWS) represents two fundamental shifts:

• A move away from content in the mobile space to mobile infrastructure.
• A more cautious directive from its Board to "harvest" more non-core acquisitions.

Looking at the first shift - VeriSign divides its Communications Services Group (52% of total revenue in Q2 2006 or $206M) into two categories:

1. Communications - connectivity, database and messaging ($120m in Q2 2006)
2. Commerce and Content - included Business to Consumer applications such as Jamba! and Jamster!, and Business to Business digital content services and mobile marketing. ($86m in Q2 2006)

The deal with News Corp. involves the mobile content part of the business (Jamba! and Jamster! was $74m in revenue out of a total mobile content revenue number of $86m in Q2 2006).

A greater question remains on the Communications part of the business, which has not shown significant growth despite acquisitions. In the Q2 Conference Call CEO Stratton Sclavos was asked a question about the lack of growth in the core communications business and the sequential decline that was expected in that segment in Q3. He responded:

"Its continued price pressure on data base services for some key carriers, especially now that they have got much more volume, as well as the loss of intercarrier traffic."

In my view, the deal with News Corp marks a shift for VeriSign, signifying they will not make further content acquisitions. Rather, they will spend time to fix up and possibly sell the communications part of the business where carrier consolidation makes growth difficult and pricing also tough. A change in the boardroom seems to have occurred -- the days of new niche acquisitions have past and a harvesting of assets and narrowing of vision has started.

Others see the company differently. Goldman Sachs analyst Sarah Friar in her note dated September 12 2006, posed her concern this way:

the company will now screen poorly on revenue growth for CY2007 after a similar impact in CY2006 when the payments business was sold. We [Goldman Sachs] estimate a revenue decline of about 8% in CY2007 versus 10% growth prior.

I have highlighted in the past, that my concerns have been that the flurry of acquisitions have not bought incremental cashflow to VRSN as one would expect with successful acquisitions. This is apparent in the following tables:

I remain concerned that the past acquisitions were not focused but rather designed to mask a slowing in the core communications group. The 10Q for June 2006 has not yet been filed due to the options issues which have arisen.

VeriSign faces NASDAQ delisting according to the last 8K filing (August 17 2006) for failure to file its 10Q.

Complications surround the option issue as one of the VeriSign Board members until his resignation on July 31 2006 was Gregory Reyes. In fact, Mr Reyes was a member of the Compensation Committee of the VRSN Board. Serious issues have arisen with Mr Reyes in his former capacity of CEO of Brocade.

Related:

• 9 Reasons Why I'm Short Verisign (VRSN)
• Verisign Quarterly Update: This One Continues to be a Good Short Candidate

Disclosure: I, David Segelov, hold a short position in VRSN.

Comments

[David Segelov]

Nice payoff if you can get it. What cant Mr Irvin say that might be of interest?

This was filed in an 8-k on Nov 8 2006


On October 31, 2006, VeriSign, Inc. (“VeriSign”) entered into a Severance and General Release Agreement (the “Agreement”) with Vernon Irvin, Executive Vice President of VeriSign Communications Services.

In consideration of Mr. Irvin’s service with the Company and in exchange for Mr. Irvin’s release of claims and covenant not to sue, the Company will pay Mr. Irvin a severance payment in the total amount of $683,520.00, 67% of which will be paid within one month of the date Mr. Irvin executes the Agreement and the other 33% of which will be paid on the one year anniversary of the termination of his employment, subject to Mr. Irvin’s compliance with non-solicitation and non-competition provisions. The Company will also pay Mr. Irvin up to approximately $215,000, representing 84% of his 2006 target bonus based on the performance of both the Company and VeriSign Communications Services. The payment of the 2006 bonus will be made at the time that VeriSign issues annual bonuses to its employees, which typically occurs in March. The Company will also make payments to Mr. Irvin for his COBRA and life insurance premiums, and will also provide certain administrative and other support as set forth in the Agreement.

Upon termination of Mr. Irvin’s employment with VeriSign and subject to compliance with applicable law and any stock option exercise limitation imposed by the Board of Directors, VeriSign will accelerate vesting of twenty-five percent (25%) of Mr. Irvin’s then unvested stock options to purchase shares of VeriSign common stock for which the fair market value is greater than the exercise price of his employment on the termination date. Also upon termination of Mr. Irvin’s employment, and subject to compliance with applicable law, VeriSign will accelerate vesting of twenty-five percent (25%) of his then unvested restricted stock units of VeriSign common stock.

The foregoing is a summary of the terms and conditions of the Agreement and does not purport to be complete. The foregoing is qualified in its entirety by reference to the Agreement, a copy of which is filed as Exhibit 99.01 to this Current Report on Form 8-K and is incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits.

[David Segelov]

Nov 22 announcement of a $250M charge to earnings is amazing.

On a pro-forma basis it means about 40% of the Net Income never existed.

On a non-pro forma basis (excluding all the acquisitions which were factored in ex-post facto) the number is close to 60% of Net Income never existed.

Staggering.

Wall Street keeps treating these announcements as one off write-offs. Amazing