VRSN is a play on the technology that serves as the backbone to the digitization of life. .

Verisign (VRSN) is the leader in providing the technology that supports the backbone of the Internet, having positioned itself at the forefront of the coming integration of Internet technologies with mobile communications and the further digitization of life. Verisign is divided into two divisions, 1. Internet and 2. Communcations. Each of these divisions is split into two parts. The Internet division is split between Directories and also Security. In Security, Verisign has established themselves as the gold standard both in terms of services and also online security verification. In their Directory Naming Service division, they leverage off of their contract with ICANN as the central administrator of both the .com and .net root servers. Within Communications, Verisign has made inroads, primarily through acquisitions, towards establishing themselves as a leader in online billing and security. In addition to billing services, they also provide a host of other services. The other half of their communications business is Jamba, a mobile content business primarily focused on selling things like ringtones to teenagers.

Within the Internet space, they have positioned themselves at the forefront of an industry that continues to grow in the low double digits each year [new websites being registered, etc]. Furthermore, with a new contract with ICANN that gives them management of the .com domain through 2012 with more opportunities to cross-sell than before and the increasing use of e-commerce transactions (and the necessity of security), Verisign has positioned themselves for 20%+ revenue and EPS growth in the Internet space for more years to come. Because of the network effects of being a leader in something as sensitive to reputation as security and the leverage and expertise that come with managing the root servers to the .com domains, Verisign has a strategic position with high barriers to entry that help to protect their 20%+ operating margins.

Within the Communications space, Verisign does not yet have quite the strategic position that they do within the Internet space, but they benefit from exposure to a fast growing industry. However, Communications is blighted by their Jamba content products. Jamba originally appeared to be a great acquisition as revenue grew 50%+ sequentially but it has recently collapsed due in part to some one-time structural changes in the European market. Jamba has introduced Verisign to a large amount of earnings volatility, successive downward revisions to 2005 guidance and most recently, a decision not to issue forward fiscal year guidance due to a lack of visibility.

VRSN’s 2006 lack of guidance represents a buying opportunity. The street is focused on VRSN’s lagging communications business, but the story is within their core Internet Services Group, where they continue to strengthen their leadership position through niche acquisitions related to the security and management of the backbone of the Internet that they are able to dominate. As VRSN continues to sell off lower-margin, non-core assets (they recently sold a payment gateway to EBay in return for a long-term, recurring, higher-margin relationship and Jamba should be sold next), the street should begin to refocus on the excellent core business that VRSN offers. Furthermore, with the stock sitting just a couple of dollars over a 52-week low (and down from a high in the low $30’s), VRSN’s management has shown that it is serious about repurchasing stock (3%+ of shares outstanding were purchased last quarter and around 3% should be repurchased this quarter as well) and, as VRSN was just added to the S&P on 1/31/06, there should be significant valuation support at these levels. The downside? Earnings in 2006 should be flat to negative, making it difficult to bring in any growth-oriented investors. In evaluating the upside potential, the core operations should produce around $.87 in earnings in 2006. Given the potential for long-term 20%+ growth and VRSN’s strategic position, a multiple of, say, 25x on the core business seems reasonable and values VRSN at $21.70/share. Add the $3.30 in cash that they have and you get to $25, slightly aboave the current valuation—and this values Jamba at $0. If Jamba could be sold for, say, anything, that is just free upside and as 2007 rolls around, Jamba should trade up towards the low $30’s as the street realizes what ’07 numbers should be ($1.05-1.10 in core business) and the value of cash available to shareholders. Nor does this even include potential upside from such new relationships such as responsibility for managing the ONS tree that will be for RFID technologiy what the .com root servers are for the Internet.