VeriSign, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless noted. VeriSign operates Internet infrastructure services, principally domain-name registry services. Its .com and .net registries accounted for substantially all revenue; the company reported 116.7 million active .com and .net names, up 8% year over year.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Revenue | $205.7 million | $181.5 million; up 13% |
| Operating income / margin | $98.9 million / 48% | $65.5 million / 36% |
| Continuing-operations income | $66.1 million | $42.3 million |
| Net income / diluted EPS | $68.0 million / $0.42 | $40.8 million / $0.24 |
| Operating cash flow | $110.3 million | $90.3 million |
| Cash, cash equivalents and marketable securities | $1.386 billion | $1.346 billion at Dec. 31, 2011 |
| Debt | $592.8 million carrying value of convertible debentures; $100 million long-term debt | $590.1 million and $100 million at Dec. 31, 2011 |
Cash from operations less $12.9 million of property-and-equipment purchases was approximately $97.4 million. The convertible debentures’ disclosed fair value was $1.6 billion. The company also had a $200 million credit facility, with $100 million borrowed. Stockholders’ deficit was $71.3 million at quarter-end.
Material changes and drivers
- Revenue rose $24.2 million, driven by 8% growth in .com/.net names and registry fee increases. Effective January 15, 2012, .com fees increased 7% to $7.85 and .net fees 10% to $5.11.
- Operating income increased 51%, reflecting higher revenue, lower general and administrative expense after the Authentication Services divestiture, and reduced restructuring charges. Restructuring was a $0.5 million credit versus $5.5 million of expense a year earlier.
- General and administrative expense fell 30% to $23.5 million. Sales and marketing rose 24% to $27.8 million, including $2.4 million of new-gTLD application fees; research and development rose 9% to $14.8 million.
- Non-operating income declined to $0.8 million from $5.5 million, mainly because transition-services income and investment income declined. Income from discontinued operations was $1.9 million, primarily from reversal of retained liabilities.
- Cash increased $39.7 million during the quarter. Financing used $60.0 million, including $75.1 million of common-stock repurchases; the company repurchased 1.8 million shares for $68.4 million under its buyback program.
Outlook, commentary and risks
Management expected fiscal 2012 revenue to increase from 2011, citing continued .com/.net registration growth and renewals at the January fee levels. It expected cost of revenue and research and development as a percentage of revenue to remain broadly consistent, and sales and marketing and general and administrative percentages to decline slightly. These are expectations, not quantified full-year guidance. Management said existing liquidity and operating cash generation should cover working capital, capital expenditures and debt service for the next 12 months.
ICANN had posted negotiated .com renewal terms that were substantially similar to the existing agreement, with new indemnification and audit provisions. The .com agreement was due to expire in November 2012. VeriSign had applied for 14 new gTLDs and was selected by applicants for approximately 220 others as a backend registry provider; approval, launch timing, commercial success and financial impact remained uncertain. The filing also highlights risks from dependence on .com/.net, registration and renewal trends, cyberattacks or service outages, regulatory and ICANN decisions, competition from new TLDs, and economic conditions.
Other items to monitor include the derivative shareholder lawsuit alleging proxy-statement and compensation-plan issues; the company said it intended to defend the case. A previously disclosed consumer class settlement had received final court approval, and the company had accrued its expected costs, which it said were not material. For certain claims related to the divested Authentication Services business, indemnification exposure was subject to a $50 million cap after February 9, 2012. The company also held $1.1 billion of cash and cash equivalents at foreign subsidiaries and intended to permanently reinvest certain foreign funds; repatriation could require additional U.S. taxes.
Important facts for investors to verify
- Progress and final terms of the .com renewal, and the effect of the January fee increases on renewals and registration growth.
- ICANN decisions and costs for the company’s new-gTLD applications and backend-service commitments.
- Cash generation and capital allocation, including repurchases, capital spending, and the amount and accessibility of foreign-held cash.
- Convertible-debt obligations, potential conversion or repurchase cash needs, and credit-facility availability.
- Developments in the derivative litigation and divestiture-related indemnification obligations.