VeriSign, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. VeriSign’s business is primarily domain-name registry services, particularly .com and .net; security-services revenue is not significant. The company reported approximately 144.3 million .com and .net registrations in its domain-name base.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $288.6 million | $286.5 million | $577.2 million | $568.3 million |
| Operating income | $175.0 million | $176.3 million | $350.2 million | $343.0 million |
| Net income | $123.1 million | $113.2 million | $239.5 million | $220.7 million |
| Diluted EPS | $0.99 | $0.87 | $1.93 | $1.68 |
| Operating margin | 60.6% | 61.5% | 60.7% | 60.3% |
For the six months, operating cash flow was $328.9 million, versus $317.0 million a year earlier. Investing activities used $1.7 million and financing activities used $317.8 million, primarily reflecting $325.8 million of share repurchases, partly offset by employee stock-plan proceeds. Cash and cash equivalents were $242.4 million; marketable securities were $1.566 billion. Total cash, cash equivalents and marketable securities were $1.808 billion, of which $1.5 billion was held by foreign subsidiaries and intended to remain invested abroad.
At June 30, principal debt included $1.25 billion of 2023 and 2025 senior notes and $1.25 billion of 2037 subordinated convertible debentures. The company had no borrowings under its $200 million revolving credit facility. Balance-sheet stockholders’ deficit was $1.203 billion. Current liabilities included $715.98 million of deferred revenue and $628.91 million carrying value for the convertible debentures.
Changes versus prior comparable periods
- Revenue rose 1% in Q2 and 2% for the first half. Growth reflected a 1% year-over-year increase in the .com/.net domain base and .net fee increases implemented in February 2016 and February 2017.
- Q2 operating income declined 1%; first-half operating income increased 2%. First-half general and administrative expense rose 16%, including higher compensation and legal costs, while research and development expense fell 13% and sales and marketing expense fell 5%.
- Net income increased 9% in Q2 and 9% for the first half. Results included a $10.6 million pretax gain on the April sale of iDefense, higher interest income, and a lower first-half effective tax rate (22% versus 24%), including $6.7 million of excess stock-compensation tax benefits.
- The domain base increased 1% year over year; Q2 net additions were 0.7 million. Q2 new registrations were 9.2 million versus 8.6 million. The final .com/.net renewal rate for Q1 2017 was 72.5%, down from 74.4% a year earlier.
Outlook, developments and risks
- Management expected second-half 2017 revenue to be consistent with first-half revenue, factoring in revenue lost from the iDefense sale. It expected cost of revenue as a percentage of revenue to decrease slightly; sales and marketing as a percentage to increase slightly; and R&D and G&A percentages to remain broadly consistent. Interest expense was expected to increase due to the July debt issuance and potential contingent interest.
- On July 5, 2017, VeriSign issued $550 million of 4.75% senior notes due 2027, intending to use proceeds for general corporate purposes, including possible share repurchases. On July 27, it announced a .net annual fee increase from $8.20 to $9.02 effective February 1, 2018. The .net registry agreement was renewed through June 30, 2023.
- The convertible debentures were convertible at holders’ option through September 30, 2017 after the share-price trigger was met. VeriSign intended not to redeem them at that time; conversion or settlement could require financing if cash and operating funds proved insufficient. The company also expected to pay $7.5 million of contingent interest in August 2017.
- A majority of liquidity was held offshore and intended to be indefinitely reinvested; repatriating funds could require additional U.S. taxes. Management believed available liquidity, operating cash flow and borrowing capacity were sufficient for at least 12 months.
- The DOJ issued a Civil Investigative Demand concerning VeriSign becoming registry operator for .web; the company was cooperating and could not estimate potential outcomes. Key business risks include dependence on .com/.net agreements and renewal terms, domain-registration demand and renewal rates, competition and regulatory change, cyberattacks or service outages, and substantial debt. Management said market-risk exposures had not changed significantly since year-end.
- Adoption of ASU 2016-09 resulted in a $45.4 million decrease in accumulated deficit at January 1, 2017, including recognition of previously unrecognized excess tax benefits; it also changed cash-flow presentation. The company did not expect the 2018 revenue-recognition standard to have a material financial-statement impact.
Important facts for investors to verify
- Whether domain-base growth and renewal rates stabilize, particularly given the lower Q1 renewal rate and China revenue declines.
- The sustainability of earnings growth after separating the $10.6 million iDefense sale gain and stock-compensation tax benefits.
- The effect of the 2027 notes, contingent interest and any convertible-debenture conversion or settlement on interest expense, liquidity and share count.
- Availability and tax cost of offshore liquidity, and the intended pace and funding of share repurchases.
- Any material outcome from the DOJ .web inquiry, and developments affecting the .com/.net agreements or registry pricing and renewal terms.