VeriSign, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Dollar amounts are in millions unless stated otherwise. VeriSign’s single reportable segment is Naming Services; Registry Services, principally .com and .net, generates substantially all revenue. The company reported approximately 109.9 million active .com and .net domain names, up 8% year over year.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $189.8 | $167.9 | $371.4 | $329.5 |
| Operating income | $82.1 | $50.8 | $147.6 | $104.9 |
| Operating margin | 43% | 30% | 40% | 32% |
| Net income (loss) attributable to VeriSign | $(10.6) | $35.2 | $30.2 | $86.6 |
| Diluted earnings (loss) per share | $(0.06) | $0.19 | $0.18 | $0.47 |
| Operating cash flow | Not stated separately | Not stated separately | $103.2 | $250.3 |
Q2 revenue grew 13%, primarily from 8% growth in .com/.net registrations and the July 2010 registry fee increases. Operating income rose 61% in Q2 and 41% for the half, benefiting from revenue growth and lower general and administrative expenses. Reported Q2 net loss chiefly reflects $100.0 million of contingent interest triggered by the special dividend; a related $39.7 million discrete tax benefit partly offset the expense. Six-month results also include discontinued operations and should not be compared without considering the 2010 Authentication Services business.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $1,220.2 million and marketable securities were $174.6 million, totaling $1,394.8 million, down from $2,060.9 million at year-end 2010. Current assets were $1,525.1 million versus current liabilities of $651.8 million.
- Six-month cash flow included $294.9 million provided by investing activities and $740.9 million used in financing. Operating cash flow declined 59% year over year, reflecting the contingent-interest payment and the absence of cash flows from the divested business.
- The company paid a $463.5 million special dividend ($2.75 per share) and repurchased $310.7 million of stock during the first half. Cash and securities fell accordingly; stockholders’ equity moved from $676.4 million at year-end to a $4.2 million deficit.
- Convertible debentures, including the contingent-interest derivative, were carried at $585.0 million; their quoted fair value was $1.4 billion. The filing identifies substantial debt-related obligations, including potential cash settlement upon conversion or a fundamental change.
- Approximately $1.1 billion of cash, cash equivalents and marketable securities was held by foreign subsidiaries and intended to be permanently reinvested abroad. Management said available liquidity and operating cash generation should meet working-capital, capital-expenditure and debt-service needs for the next 12 months.
Outlook, material events and risks
- Management expected revenue to continue increasing in fiscal 2011, supported by domain growth and the July 2010 fee increase; it also expected continued international growth. In July 2011, VeriSign announced further .com and .net fee increases, effective January 15, 2012.
- Management expected cost of revenue, sales and marketing, and research and development as percentages of revenue to remain broadly consistent during the rest of 2011; general and administrative expense as a percentage of revenue was expected to decline. Remaining cash and stock-based restructuring charges were expected during the rest of 2011; the amount of future stock-based charges was not clearly determined.
- VeriSign renewed its .net registry agreement for six years, effective July 1, 2011. The .com registry agreement was due to expire in 2012, presenting a material business risk if not renewed on acceptable terms. The company also cited uncertainty around new top-level domains, competition, registrar marketing and domain renewal demand.
- CEO Mark McLaughlin resigned effective August 1, 2011; the Board elected Jim Bidzos as CEO effective that date. McLaughlin was to remain with the company through August 25.
- A proposed settlement of the Herbert consumer class action was reached in principle in July 2011. VeriSign agreed to pay 60% of settlement costs; court approval and final documentation remained outstanding, and the company cautioned that costs could exceed its accrual. The CFIT litigation was dismissed with prejudice following a settlement in which VeriSign made no payment.
- Other notable exposures include a $125 million cap on certain indemnification obligations to Symantec, $43.5 million of gross unrecognized tax benefits, restructuring and divestiture-related liabilities, and operational, cybersecurity, regulatory and litigation risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification points
- Separate the underlying operating performance from the $100.0 million dividend-triggered contingent interest and associated tax benefit when assessing earnings.
- Review the .com agreement renewal outlook and the effects of announced registry fee increases, new TLDs, registration growth and renewal rates.
- Assess the sustainability of cash generation after the special dividend, repurchases and lower operating cash flow, including the implications of foreign-held funds being permanently reinvested.
- Check the debentures’ market value, potential cash settlement requirements and the distinction between carrying value and fair value.
- Track approval and final cost of the Herbert settlement, remaining restructuring charges, tax contingencies and indemnification claims.
- Monitor execution of the CEO transition and the ongoing corporate-function migration and retention of key employees.