VeriSign, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; filed April 29, 2011. VeriSign provides Internet infrastructure services, with one reportable segment, Naming Services. Registry Services is the principal business; the company reported approximately 108.0 million active .com and .net domain names, up 9% year over year. Network Intelligence and Availability Services revenue was not significant.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Revenue | $181.5 million | $161.6 million | Up 12%; primarily higher .com/.net registrations and July 2010 fee increases |
| Operating income | $65.5 million | $54.1 million | Up 21%; operating margin 36.1%, versus 33.5% |
| Income from continuing operations, net | $42.3 million | $30.0 million | Up 41% |
| Net income attributable to VeriSign stockholders | $40.8 million | $51.4 million | Down 21%, principally reflecting discontinued operations |
| Diluted EPS | $0.24 | $0.28 | Continuing-operations EPS was $0.25 versus $0.16 |
| Cash from operating activities | $90.3 million | $101.1 million | Down 11%; company cited divestiture effects and timing of customer receipts |
| Capital expenditures | $15.6 million | $19.9 million | Purchases of property and equipment |
Cost of revenues was $40.9 million, or 22.5% of revenue, compared with $38.8 million, or 24.0%. Total costs and expenses rose to $116.0 million from $107.5 million. Restructuring charges increased to $5.5 million from $0.2 million in continuing operations. Income tax expense from continuing operations was $16.9 million; the effective tax rate declined to 29% from 36%.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $1.441 billion and marketable securities were $506.0 million, for combined cash and marketable securities of $1.947 billion, down from $2.061 billion at year-end 2010.
- Total assets were $2.331 billion; total liabilities were $1.785 billion; stockholders’ equity was $545.3 million.
- The balance sheet reports $583.9 million of convertible debentures, including the contingent-interest derivative. Separately, the filing states the debentures’ fair value was $1.5 billion. The company describes 3.25% convertible debentures due 2037.
- Cash decreased by $118.8 million during the quarter. Financing used $187.3 million, including $207.4 million of common-stock repurchases; investing used $23.5 million.
- Management said existing cash, securities and operating cash generation should cover working capital, capital spending, debt service, and the announced dividend and related contingent-interest payment for the next 12 months.
Material changes and notable items
- Revenue growth reflected a 9% increase in active .com and .net domain names and fee increases effective July 1, 2010: .com rose 7% to $7.34 and .net rose 10% to $4.65.
- Q1 share repurchases totaled 5.6 million shares for $199.6 million at an average $35.54 per share. Approximately $1.2 billion remained available under the repurchase program at quarter-end.
- Discontinued operations produced a $1.5 million loss attributable to VeriSign stockholders, versus $21.3 million of income in Q1 2010. The 2011 amount included a $2.9 million discrete tax charge related to the Authentication Services divestiture purchase-price allocation, agreed in April 2011.
- The 2010 restructuring plan, associated with the Authentication Services sale and the move of corporate functions to Virginia, had estimated cash charges of $22.5 million for severance and $11.5 million for facility exit costs. The company expected remaining cash and stock-based charges over several quarters through fiscal 2011; it could not estimate the remaining stock-based amount.
- On April 27, 2011, the board declared a $2.75-per-share special dividend totaling approximately $463.3 million, payable May 18. The dividend triggered an additional $100.0 million contingent-interest payment to debenture holders on that date.
Outlook, risks and contingencies
- Management expected fiscal 2011 revenue to increase versus fiscal 2010, driven by continued .com/.net domain growth and the full effect of the July 2010 fee increases as registrations renew. It expected continued domain growth in 2011, including internationally.
- For the remainder of 2011, management expected cost of revenues as a percentage of revenue and R&D as a percentage of revenue to remain consistent with Q1; sales and marketing as a percentage of revenue to increase slightly; and G&A as a percentage of revenue to decline.
- The filing highlighted uncertainty over renewal of the .net registry agreement on expected terms and timing, and the .com agreement’s 2012 renewal. New TLDs and potential changes to ICANN policies could affect competition and revenue; the company said their impact was not assessable.
- Key operating risks include dependence on .com/.net registrations and renewals, competition and pricing, cyberattacks and service interruptions, economic conditions, international operations, and the post-divestiture transition and retention of personnel.
- CFIT antitrust litigation remained pending after dismissal of its third amended complaint; a fourth amended complaint asserted Sherman Act claims regarding .com, but sought neither damages nor disgorgement. The company said litigation outcomes and possible losses generally could not be estimated; it did not believe the matters reviewed would materially adversely affect financial condition or results.
- VeriSign agreed to indemnify Symantec for certain Authentication Services-related claims for 60 months after closing, subject to a $4 million aggregate threshold and a $125 million cap. Gross unrecognized tax benefits were $36.2 million at quarter-end and were expected to increase over the next 12 months.
Important facts for investors to verify
- Progress and terms of the .net renewal, and the status and terms of the .com agreement renewal.
- Whether domain-name growth and the 2010 fee increases support the company’s fiscal 2011 revenue outlook.
- Cash and liquidity after the $463.3 million dividend and $100.0 million contingent-interest payment, alongside share repurchases and debt obligations.
- Remaining restructuring costs, execution of the post-divestiture transition, and the effect of the divested business on comparable results and cash flows.
- Developments in CFIT and other litigation, Symantec indemnification exposure, and uncertain tax positions.