VeriSign, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results. VeriSign operates domain-name registry services, principally .com and .net, and Network Intelligence and Availability services; registry services generate substantially all revenue.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $250.4m | $239.3m | $499.2m | $475.8m |
| Operating income | $143.1m | $132.1m | $282.7m | $265.3m |
| Net income | $100.2m | $86.9m | $194.6m | $171.4m |
| Diluted EPS | $0.71 | $0.55 | $1.34 | $1.07 |
| Operating margin | 57.1% | 55.2% | 56.6% | 55.8% |
| Net margin | 40.0% | 36.3% | 39.0% | 36.0% |
Revenue rose 5% in both periods; operating income increased 8% in Q2 and 7% year to date. Net income increased about 15% and 14%, respectively. Lower effective tax rates (21% in Q2 and 23% year to date, versus 27% in both 2013 periods) contributed to earnings growth. Q2 included a $5.2m discrete tax benefit related to repatriation. Six-month interest expense increased to $42.9m from $32.4m, principally reflecting the Senior Notes issued in 2013.
Domain names in the .com and .net registries totaled 128.9m at quarter-end, up 4% year over year. Q2 net additions were 0.4m; new registrations were 8.5m versus 8.7m a year earlier. The final Q1 renewal rate was 72.6%, down from 73.2%.
Cash flow, liquidity and debt
- Six-month operating cash flow was $262.7m, down 12% from $297.5m. Capital expenditures were $18.7m, implying operating cash flow less capex of approximately $244.0m.
- Cash and cash equivalents were $237.4m and marketable securities $1.308bn at June 30, totaling $1.545bn. Marketable securities were U.S. Treasury securities, all maturing in less than one year. The filing reports an additional $8.4m of restricted cash in other long-term assets.
- Cash declined $101.9m during the first half. Financing cash outflow was $422.4m, including $446.7m of common-stock repurchases. The company repurchased 8.5m shares for an aggregate cost of $431.6m during the period.
- Debt included $750m principal amount of 4.625% Senior Notes due 2023 and $1.25bn principal amount of 3.25% subordinated convertible debentures due 2037. No borrowings were outstanding under the $200m revolving credit facility. The convertible debentures were convertible at holders’ option through September 30, 2014, based on the stock-price trigger.
- VeriSign completed a $740.9m repatriation of foreign cash, net of $28.1m withholding taxes. It reported $816.6m of cash and marketable securities held by foreign subsidiaries at June 30 and intends to indefinitely reinvest remaining foreign funds; repatriation could entail additional U.S. taxes.
Changes, outlook and notable items
- Revenue growth primarily reflected 4% growth in .com/.net names and .net fee increases effective July 2013 and February 2014. The .net annual fee was increased to $6.18 in February 2014; a further increase to $6.79 was announced for February 1, 2015. The .com fee remained $7.85 under the current agreement, subject to limited contractual exceptions.
- Management expected 2014 revenue to exceed 2013 revenue, supported by domain-base growth and .net price increases. It expected continued domain-name growth, but noted that economic conditions, registrar marketing changes and search-engine changes could constrain it. The filing provides no specific numerical revenue or earnings forecast.
- Management expected interest expense to remain consistent with the first-half level for the remainder of 2014. It anticipated cost of revenue and R&D as a percentage of revenue to remain broadly consistent; marketing expense could increase modestly during the remainder of the year, while full-year marketing expense as a percentage of revenue was expected to be comparable to 2013.
- The board authorized an additional approximately $490.6m of repurchases on July 23, bringing the amount authorized and available under the program to $1.0bn. Through July 23, the company had repurchased a further 1.2m shares for $59.0m.
- Key risks include dependence on .com/.net registrations and renewals; registrar marketing and renewal trends; new gTLD competition and DNS security or stability issues; reliance on ICANN and government agreements; cyberattacks and service interruptions; tax uncertainty; and debt-conversion, liquidity and refinancing risks. Management stated existing liquidity, operating cash generation and the credit facility should cover working capital, capital expenditures and debt service for at least 12 months.
- Management said ordinary-course legal matters were not expected to have a material adverse effect, but outcomes and potential losses generally could not be estimated. An indemnity to Symantec for certain claims relating to the divested Authentication Services business is subject to a $4.0m threshold and a $50.0m cap.
Important facts for investors to verify
- Whether domain-base growth, registration volumes and renewal rates continue to support revenue growth, particularly amid registrar marketing changes and new gTLD competition.
- How the announced .net fee increase and contractual pricing limits for .com affect future revenue.
- The availability and tax consequences of foreign-held liquidity, and any material changes in tax assets, foreign tax credits or uncertain tax positions.
- Convertible-debenture conversion or repurchase activity, potential cash settlement needs, and the impact of share repurchases on liquidity and share count.
- Developments in DNS security, new gTLD delegation, ICANN/government agreements, and legal or indemnification matters.