VeriSign, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. VeriSign operates domain name registry and internet security services; its .com and .net registrations are the principal revenue source. The company reported approximately 143.6 million .com and .net registrations at quarter-end.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Revenue | $288.6 million | $281.9 million; up 2% |
| Operating income / margin | $175.3 million / 60.7% | $166.8 million / 59.2% |
| Net income / margin | $116.4 million / 40.3% | $107.5 million / 38.1% |
| Diluted EPS | $0.94 | $0.82 |
| Operating cash flow | $148.2 million | $149.6 million |
| Cash and marketable securities | $1.786 billion | $1.798 billion at Dec. 31, 2016 |
| Debt principal outstanding | $2.5 billion | Unchanged principal amounts disclosed |
Net cash increased $222.6 million to $454.6 million. Investing activities provided $238.8 million, largely reflecting net maturities and sales of marketable securities; financing activities used $165.1 million, including $173.0 million of share repurchases. Cash, cash equivalents and marketable securities were primarily U.S. Treasury securities, and all debt securities had contractual maturities of less than one year. No borrowings were outstanding on the $200 million revolving facility.
Changes versus the comparable period
- Revenue rose $6.7 million, mainly from 1% growth in the .com/.net domain base and .net fee increases effective in February 2016 and 2017. The .net annual fee increased from $7.46 to $8.20 in February 2017; the .com fee was $7.85.
- Operating income increased 5% and net income increased about 8%; lower sales and marketing and R&D costs more than offset higher G&A expense.
- New .com and .net registrations totaled 9.5 million, down from 10.0 million. The domain base grew 1% year over year and increased 1.4 million from Dec. 31, 2016.
- Operating cash flow was slightly lower, reflecting higher employee/vendor and income-tax payments, partly offset by higher customer collections.
- Revenue from China fell 12%, as many registrations associated with an earlier episodic surge did not renew. U.S. revenue rose 6% and EMEA revenue rose 3%.
Outlook, risks and unusual items
- Management expects revenue growth to ease slightly during the remainder of 2017, including the effect of the iDefense sale, completed April 1, 2017. It expects cost of revenue as a percentage of revenue to decline slightly; sales and marketing as a percentage of revenue to rise slightly; and R&D and G&A percentages to remain broadly consistent. Interest expense is expected to increase slightly. No specific full-year revenue or earnings guidance is provided.
- The final renewal rate for Q4 2016 was reported as 67.6%, but the comparison to 73.3% is described as being for “the same quarter in 2016”; the filing text does not provide a clear comparison period. Renewal rates are not fully measurable until 45 days after quarter-end.
- On Feb. 9, the board authorized total repurchases of up to $1.0 billion. The company repurchased 1.8 million shares for $150.0 million during the quarter; $920.1 million remained authorized at March 31. It bought a further 0.5 million shares for $40.6 million through April 26.
- Convertible debentures with $1.25 billion principal were convertible at holders’ option through June 30, 2017, following the share-price trigger. The company said it did not expect material near-term conversions but warned that cash settlement could require financing if conversions exceeded available cash and operating cash flows. It intended not to redeem the debentures when redemption became available in August 2017. A further $7.5 million contingent-interest payment was due in August.
- Most cash and marketable securities—$1.5 billion—were held by foreign subsidiaries and intended to be indefinitely reinvested abroad; repatriation without prior U.S. tax provision could incur additional U.S. taxes. Management stated that available liquidity, operating cash flows and the revolver should cover needs and debt service for at least 12 months.
- Adoption of ASU 2016-09 reduced the effective tax rate to 21% from 24%, including $6.2 million of excess stock-compensation tax benefits. The adoption also produced a $45.4 million reduction in accumulated deficit at Jan. 1, 2017. These are accounting and tax effects, not recurring operating revenue.
- The DOJ issued a Civil Investigative Demand concerning VeriSign’s becoming the .web registry operator; the company said it was cooperating, and potential outcomes could not be estimated. The .net registry agreement was scheduled to expire June 30, 2017, with presumptive renewal rights; the filing identifies renewal failure as a material business risk. The .com agreement and related Cooperative Agreement also face future amendment, extension and pricing uncertainties.
- Other key risks include dependence on .com/.net registry services, domain renewal and registration trends, competition from ccTLDs and new gTLDs, cybersecurity and service interruptions, regulatory changes, and substantial indebtedness. Management reported no significant change in market-risk exposures and said disclosure controls were effective.
Important facts for investors to verify
- Renewal-rate data and the intended comparison period for the reported 67.6% and 73.3% figures.
- Progress and terms of .net renewal, and developments in the DOJ .web inquiry and related contingencies.
- Actual registration growth, renewal trends and revenue effects from .net pricing and the iDefense divestiture.
- Convertible-debenture conversion activity, potential cash settlement needs, August contingent interest and the company’s financing capacity.
- Availability and tax cost of offshore liquidity, and the pace and funding of further share repurchases.