VeriSign, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. VeriSign operates critical internet infrastructure and provides registry services, primarily for the .com and .net top-level domains. At quarter-end, its .com and .net domain name base was 174.2 million.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $356.9 million | $334.3 million | $1,055.7 million | $987.3 million |
| Operating income | $236.8 million | $221.3 million | $697.6 million | $644.7 million |
| Operating margin | 66.3% | 66.2% | 66.1% | 65.3% |
| Net income | $169.5 million | $156.6 million | $494.3 million | $454.7 million |
| Diluted EPS | $1.58 | $1.40 | $4.55 | $4.04 |
Q3 revenue and operating income each rose 7% year over year. Nine-month revenue rose 7%, operating income 8%, and net income approximately 9%. Net margin was 47.5% in Q3 and 46.8% for the nine-month period. The nine-month effective tax rate increased to 24% from 21%, mainly reflecting a higher foreign effective tax rate following an intellectual-property transfer in late 2021.
Cash flow and liquidity: Operating cash flow was $614.2 million for the first nine months, versus $600.9 million a year earlier. Investing activities provided $546.0 million, primarily reflecting net marketable-security maturities and sales; financing activities used $821.7 million, principally for repurchases. Cash, cash equivalents, and marketable securities totaled $980.2 million at September 30, down from $1,205.8 million at year-end 2021. Current assets were $1,048.5 million and current liabilities $1,095.1 million; deferred revenue was $1,235.5 million in total.
Debt: Senior notes had a carrying value of $1,787.4 million. Outstanding principal comprised $750 million of 2.70% notes due 2031, $550 million of 4.75% notes due 2027, and $500 million of 5.25% notes due 2025. No borrowings were outstanding under the $200 million revolving credit facility. Management said available liquidity, operating cash generation, and borrowing capacity should cover working capital, capital expenditure, and debt-service needs for the next 12 months and beyond.
Material changes and business trends
- The domain name base increased 1% year over year but declined 0.2 million from June 30. Q3 new .com and .net registrations fell to 9.9 million from 10.7 million.
- The final Q2 2022 renewal rate was 73.8%, versus 75.4% for Q2 2021. Renewal rates are finalized after the 45-day grace period.
- Revenue growth was primarily driven by the September 2021 .com price increase and, to a lesser extent, growth in the .com domain base. U.S. revenue rose 10% in Q3; EMEA revenue declined 6%, with regional results also affected by registrar relocations, reincorporations, and reseller changes.
- The .com wholesale fee rose from $8.39 to $8.97 effective September 1, 2022. VeriSign announced a .net fee increase from $9.02 to $9.92 effective February 1, 2023.
- The company repurchased 4.4 million shares for $820.4 million during the first nine months, including 1.5 million shares for $275.5 million in Q3. The board increased the repurchase authorization to $1.0 billion on October 27, 2022.
Outlook, risks, and notable items
The filing provides no specific revenue or earnings guidance. Management said pandemic-related incremental demand for domain names appears to have subsided. It cited lower demand compared with the earlier pandemic period, global economic uncertainty, and reduced demand—particularly in China—as factors weighing on registrations and renewals. Competition from other domain extensions and alternatives such as social media, and changing internet-user and registrant behavior, may also constrain demand. The company reported no material changes to the risk factors in its 2021 Form 10-K and no significant changes in market-risk exposures.
VeriSign reported routine investigations, claims, and lawsuits that it did not believe would materially adversely affect its financial condition, results, or cash flows, while noting litigation may entail expense and management distraction. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the domain-base decline, lower new registrations, and weaker renewal rate persist, and how these affect revenue growth.
- The realized impact of the .com price increase effective September 2022 and the planned .net increase effective February 2023, including any demand or renewal response.
- Cash generation, liquidity, and debt-service capacity as share repurchases continue; confirm the October 2022 authorization is a subsequent event.
- Whether the higher effective tax rate and regional revenue shifts continue to affect earnings.