VeriSign, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. VeriSign operates critical internet infrastructure, including the .com and .net domain registries, root-zone maintenance, and two of the 13 global root servers. Its results are principally driven by domain registrations, renewals, and permitted registry fee changes.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change / note |
|---|---|---|---|
| Revenue | $1,327.6 million | $1,265.1 million | Up 5%; mainly .com base growth and the September 2021 price increase |
| Operating income | $866.8 million | $824.2 million | Up 5%; operating margin 65.3% versus 65.2% |
| Net income | $784.8 million | $814.9 million | Down 4%; FY2020 included a $204.2 million tax benefit, while FY2021 included a $165.5 million tax benefit |
| Diluted EPS | $7.00 | $7.07 | Down slightly |
| Operating cash flow | $807.2 million | $730.2 million | Up 11% |
| Cash and marketable securities | $1,205.8 million | $1,166.9 million | At December 31; marketable securities primarily U.S. Treasury securities |
| Senior notes | $1.8 billion principal | $1.8 billion principal | Refinanced $750 million of 4.625% notes due 2023 with 2.700% notes due 2031 |
Gross margin was approximately 85.5% in FY2021, compared with 85.8% in FY2020, based on reported revenue and cost of revenues. Net cash used in investing activities was $269.2 million; net cash used in financing activities was $719.1 million, including share repurchases and debt repayment. The company repurchased 3.3 million shares for $700.0 million under its program. It had no borrowings under its $200 million revolving credit facility. Total liabilities exceeded total assets, resulting in stockholders’ deficit of $1.26 billion at year-end.
Business trends and material changes
- The .com and .net domain name base reached 173.4 million at year-end, up 5% from 165.2 million a year earlier. New .com and .net registrations were 44.6 million, compared with 42.4 million in 2020.
- The final .com and .net renewal rate for Q3 2021 was 75.0%, versus 73.7% for Q3 2020; renewal rates are not final until 45 days after quarter-end.
- The .com wholesale fee rose from $7.85 to $8.39 effective September 1, 2021. The company announced a further increase to $8.97 effective September 1, 2022.
- Revenue from China fell 12% to $99.7 million, attributed to lower new registrations and renewal rates. Revenue rose in the U.S., EMEA, and other regions.
- Operating cash flow increased, while operating expenses grew 4% overall. Cost of revenues rose 7%; R&D rose 8%; sales and marketing rose 8%; G&A declined 1%.
Outlook, commentary, risks, and unusual items
- Management expects revenue to grow in 2022, supported by continued growth in the .com domain base and the full-year effect of the September 2021 price increase. Cost of revenues, sales and marketing, R&D, and G&A are each expected to remain consistent as a percentage of revenue.
- Management expects a 2022 effective tax rate of 21%–24%, cash taxes of 21%–24% of pretax income, and capital expenditures of $40–$50 million. It expects interest expense to decrease and non-operating loss to decrease from 2021 levels.
- The FY2021 tax benefit included a $165.5 million deferred tax asset from an internal transfer of non-U.S. intellectual property with a stated fair value of $1.20 billion. FY2020’s tax benefit included a $204.2 million remeasurement of previously unrecognized tax benefits. The 2010–2014 U.S. federal tax returns remained under IRS examination despite written confirmations described in the filing.
- Key risks include cyberattacks, DDoS events, service interruptions, and dependence on critical infrastructure and vendors; competitive or technology shifts that reduce domain demand; evolving privacy and other regulation; and potential changes to ICANN policies or the multi-stakeholder governance model.
- The business is highly dependent on the .com and .net registry agreements. The current .net term must be renewed or extended by July 1, 2023, and the .com registry agreement and related Cooperative Agreement run to November 30, 2024, subject to renewal provisions and specified conditions. Required Chinese licenses for .com and .net were due for renewal in 2022.
- VeriSign did not participate in Tuvalu’s .tv contract rebid and anticipated transitioning the registry during 2022. The $145 million deposit for .web contractual rights remained pending resolution of objections and ICANN approval. In the .web dispute, an IRP panel dismissed Afilias’s requests to invalidate the auction or award it the TLD; ICANN’s Board was reviewing the panel’s decision on delegation.
- COVID-19 had not adversely affected the company’s financial condition or results as of the filing date, but management said future effects remained uncertain. The filing states that existing liquidity and operating cash flow should meet working-capital, capital expenditure, and debt-service needs for the next 12 months and beyond.
Important facts for investors to verify
- Whether .com and .net registration growth and renewal rates continue, and how the 2022 .com fee increase affects demand and renewals.
- Renewal terms and conditions for the .net agreement in 2023, .com agreements in 2024, and the 2022 China license renewals.
- The outcome and timing of the .web delegation process, and whether the $145 million deposit is ultimately transferred to an intangible asset or becomes subject to impairment risk.
- The sustainability of reported earnings and tax assets after excluding the unusual tax benefits, and the status of the IRS examination and other tax exposures.
- Debt service, cash deployment, and the scale of future repurchases following the February 2022 authorization of up to $1.0 billion.