Warren Buffett is famous for mentioning that he likes to invest in businesses that have a strong competitive advantage, or ‘moat.’ One such ‘moat’ is to hold a geographic or pseduo-monopoly, like toll-roads. A few weeks back, I received an email from a friend recommending I take a look at Verisign, Inc. (VRSN). I had never heard of the company before. At first glance I thought that maybe they were somehow associated with the road-sign manufacturing industry. Let’s just say that my initial assumption was incorrect.
Verisign, per their annual report, is “a global provider of domain name registry services and internet security” that “ensure[s] the security, stability and resiliency of key internet infrastructure and services.” Through an agreement with the Internet Corporation for Assigned Names and Numbers (ICANN), Verisign has the exclusive rights to provide infrastructure, security, and registration services for .com and .net domain names. In layman’s terms, they are the only company on the planet that can sell domains ending in .com and .net. It’s analogous to owning the only hot dog stand at a baseball park, except the internet is your baseball park. They are a virtual toll road for the internet. It’s the closest thing to a monopoly I have seen in the markets.
Verisign began divesting non-core businesses in 2007 so they could focus on the core cash engine. The divestitures ended in 2010 and since 2011, the growth profile for the company has looked like this:
- Revenues: $772M (2011) to $1142M (2016)
- OCF: $336M to $668M
- FCF: $286M (adjusted to normalize CapEx around $50M) to $641M
- Gross Margins: 78.6% to 82.6%
- Operating Margins: 42.7% to 60.1%
- Shares Outstanding: 167M to 129M
These are spectacular numbers! Even though ICANN has a regulated price cap on Verisign, the company has managed to grow intrinsic value at a good clip. Plus, Berkshire Hathaway owns 12.5% of the company. Keep reading…