VeriSign’s Domain Goes Beyond Internet
For one of the dominant companies in electronic communications, VeriSign Inc. hasn’t been too successful communicating its own story.
Most who recognize the name know the Mountain View, Calif.-based company for running the master computers that ensure Web pages ending in “.com” and “.net” are always available and in the right hands.
But that isn’t all, or even most, of what the company does. VeriSign executives told Wall Street analysts last week that recent ventures into the telecommunications business should make the company profitable for a second consecutive quarter after four years of losses.
Yet when VeriSign gets in the news, it’s often because of a controversy related to its domain-name business.
In February, for instance, the company sued the Internet Corp. for Assigned Names and Numbers, or ICANN, the government-sponsored overseer of the Internet. VeriSign wants to reinstate its Site Finder search engine, which ICANN had told it to pull. The service redirected Web surfers who typed the wrong address.
A federal judge will hear arguments in Los Angeles on Tuesday over whether the case should proceed.
Chief Executive Stratton D. Sclavos discussed the case and the company’s new ventures last week at VeriSign’s headquarters, an office building that was the former home of Silicon Valley archetypes Fairchild Semiconductor International Inc. and Netscape Communications Corp.
Question: The Site Finder service redirected Web page seekers who typed in domain names wrong and allowed VeriSign to profit by steering those users to company clients. It outraged technologists and provoked the fight with ICANN. What are the risks in picking such a fight with what is probably the company’s most important partner?
Answer: We get to see what’s going on in the network, and what we noticed was that about 20% of the queries were not ending up where the user wanted to go. To us, it was an extension of our intelligent infrastructure services. There are many academics and technology zealots who see it as something other than that, that we were trying to hijack traffic. We categorically deny and disagree with that.
Q: The company’s had a roller-coaster ride along with the Net boom, and you’ve made some pretty bold gambles. The biggest has got to be the $21 billion -- in admittedly very high-priced company stock -- you spent to buy Network Solutions Inc. [which once held the monopoly for administering common Web page addresses]. That has got to be seen in retrospect as a colossal blunder. Why should anyone invest in a company that made that kind of mistake?
A: When you see big dollar values printed in the newspaper, it will look like a blunder in terms of economics. But the way that transaction occurred is we gave up 40% of our stock to buy a company that in the next two years generated 66% of our revenue and over 60% of our profit. I would make that trade again.
Q: To the general public, if VeriSign is known at all, it’s for maintaining the “.com” and “.net” servers that connect people to what they’re looking for. But that’s actually a minority of your business.
A: About 40% is telecommunication services. We help route telephone calls and connect phones up, wire-line and wireless. We help with information services like Caller ID and Do Not Call for telemarketing. We provide gateways so that you can send an SMS [text] message from your Cingular phone to a friend of yours who may have a Verizon phone. Very much like what we do on the Internet side, our telecommunication business is all about helping people find, connect, secure and transact.
The domain-name piece is about 20% of the revenue, and then the rest is security services -- authentication and managed security. And that is where we go out and help online merchants secure their websites and transact through our payment gateway. And we monitor the security of networks so viruses and worms can’t get in.
Q: In January, VeriSign was awarded a contract by the venture overseeing the bar code on consumer products to provide the back-end infrastructure for radio-frequency identification tags. But retailers and producers can talk to each other without that system, and Wal-Mart Stores Inc., which is the biggest supporter of RFID, says it doesn’t have any immediate plans to link up with your system. You’ve said that the contract isn’t going to provide meaningful revenue this year. When will that effort yield serious profit?
A: We view RFID and electronic product codes, as they’re known, as at the same state of their development as the Internet was in ‘93-’94. We’re beginning to show people how to use it in applications like track and trace, where you can track a product’s history throughout the supply chain and trace where it is, whether it’s counterfeit, whether it’s expired if it’s a perishable good or a pharmaceutical. We expect 2005 will be all about the pilot demonstrations of the networks for these companies, and in 2006 and 2007 we’ll start to see meaningful revenue.
Q: In some ways VeriSign has been a hodgepodge of businesses. How are the security and authentication pieces coming together with telecom services?
A: Two really important things have gone unnoticed or have been out of fashion for the past two or three years. One is the fact that voice and data will converge and we will get to the IP [Internet protocol] world. And the second is that enterprises will begin to enable business processes to work without human intervention, and we will begin to see Web services take off. Underlying all of that is the need to authenticate every node on the network.
Fast forward a few years through the tremendous hype and now the disillusionment on things like wireless data and voice over IP, and it’s all starting to work now. Four million IP [private phone systems] got put in last year. It’s going to go to eight in the next two years, and then it’s going to get into the 20s of millions. There is a need for very high-scale directories to route traffic and an underlying fabric of security and authentication to make sure that when you get from point A to point B, it really is who you think you’re talking to. That’s kind of the tag line you’ll see us unveil later this year, which is “VeriSign, where it all comes together for voice and data, for security and for authentication.”
Q: Although telecom is a very interesting place right now, particularly with voice over IP, the price competition is horrendous. Where do you benefit when your potential clients are all struggling?
A: We believe our opportunities exist in areas where there’s a need for tremendous scale, tremendous interoperability and tremendous security. We connect some 500 million phone calls every day, and that kind of scale, based on our infrastructure, allows us to generate incremental profitability. As we bring new services into the market that allow telecoms to do voice over IP, or to let a cable carrier do local telephony, we have the kind of unfair advantage of using Internet technology, which has an economic cost that’s much less than traditional voice.
Q: Speaking of money, VeriSign has lost money in each of the last four years, according to GAAP, or generally accepted accounting principles, and your stock has gone from $248 to $18. What is it going to take to get the stock moving again?
A: If we listen to our customers and provide more value, the stock price is going to take care of itself. Because of the Network Solutions sale last year [of the part of the business that sells domain names to the public, for $100 million], you’re not seeing an apples-to-apples comparison this year. Revenues are down. But operating profits for the business are likely to grow 30% this year. It will take some time for that clarity to come through as we get into GAAP-positive territory, as we did in Q1. For Q2 we’ve projected being GAAP-positive again, at a higher level, on higher revenues. If Q2 comes in as we expect, we will give rest-of-year guidance, which we believe would also show us being GAAP-positive.
