VeriSign, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 24, 2012. Although the request identifies 2011 Q4, this is an annual filing. Quarterly figures below are included where available. The statements were audited by KPMG, which issued unqualified opinions on the financial statements and internal control over financial reporting.
Business context
VeriSign provides Internet infrastructure services through one reportable segment, Naming Services. Its core Registry Services business operates the .com and .net registries and other domain-name registries; Network Intelligence and Availability (NIA) services include security intelligence, Managed DNS and DDoS protection. NIA revenue was not significant relative to consolidated revenue. The company managed 113.8 million .com and .net domain names at year-end, up 8% year over year. Substantially all revenue comes from Registry Services.
Key financial results
| Metric | FY2011 | FY2010 | Change / context |
|---|---|---|---|
| Revenue | $772.0 million | $680.6 million | Up 13% |
| Operating income | $329.4 million | $232.3 million | Up 42%; operating margin approximately 42.7%, versus 34.1% |
| Income from continuing operations, net of tax | $138.6 million | $70.0 million | Continuing-operations margin approximately 18.0%, versus 10.3% |
| Net income attributable to shareholders | $142.9 million | $831.0 million | FY2010 included a large gain on the Authentication Services sale |
| Diluted EPS | $0.86 | $4.64 | FY2010 included discontinued-operations gains |
| Cash provided by operating activities | $335.9 million | $215.2 million | Up 56% |
| Cash, cash equivalents and marketable securities | $1.346 billion | $2.061 billion | Down, primarily amid dividends, repurchases and securities sales |
| Debt carrying amounts | $590.1 million convertible debentures; $100.0 million revolving-facility borrowing | $581.6 million convertible debentures; no facility borrowing | Convertible debentures have $1.25 billion principal; disclosed fair value was approximately $1.5 billion |
Gross margin, calculated as revenue less cost of revenue, was approximately 78.6% in 2011 versus 77.0% in 2010. Interest expense was $147.3 million, including $100.0 million of contingent interest triggered by the 2011 special dividend. Cash used in financing was $852.2 million, including $550.1 million of share repurchases and $463.5 million of dividends. Property and equipment purchases were $192.7 million. Year-end stockholders’ equity was a deficit of $88.1 million, compared with positive equity of $676.4 million a year earlier.
Q4 2011: Revenue was $203.6 million, operating income $92.9 million, and continuing-operations net income $45.3 million. Total net income was $53.8 million, including $8.5 million from discontinued operations. Q4 2010 revenue was $178.8 million, operating income $67.5 million, and total net loss $40.5 million.
Changes versus prior period and capital allocation
- Revenue growth was attributed mainly to 8% growth in active .com/.net names and the July 2010 registry fee increases. A further fee increase, announced in July 2011, took effect January 15, 2012: .com fees rose from $7.34 to $7.85 and .net from $4.65 to $5.11.
- Operating income improved as revenue grew and general and administrative expense fell 19%, partly reflecting post-divestiture cost reductions. Selling and marketing expense rose 17%, while cost of revenue rose 5%.
- Reported total net income fell sharply from 2010 because 2010 included a $726.2 million after-tax gain on the Authentication Services divestiture. The business was sold to Symantec in August 2010; FY2011 continuing operations are more informative for operating comparisons.
- VeriSign repurchased 16.3 million shares for $534.6 million and paid a $463.5 million special dividend in 2011. The dividend also resulted in the $100.0 million contingent-interest payment to convertible-debenture holders. The company sold $546.0 million of marketable securities, primarily to fund the dividend.
- The company purchased its Reston headquarters for approximately $118.5 million and drew $100.0 million under a new $200.0 million unsecured revolving facility. The facility matures in November 2016; VeriSign reported compliance with its financial covenants at year-end.
Outlook, risks and unusual items
- Management expected FY2012 revenue to increase, based on continued .com/.net domain growth and the January 2012 price increase as registrations renew. It expected cost of revenue as a share of revenue to decrease slightly, sales and marketing as a share of revenue to increase slightly, R&D as a share to remain consistent, and G&A as a share to decrease. Planned 2012 capital expenditures were 7%–10% of revenue.
- The .com registry agreement and related Department of Commerce agreement were due to expire November 30, 2012. Renewal was in process; failure to renew on the same or similar terms could materially harm the business. The .name agreement was also due to expire in 2012; the .net agreement had been renewed through June 2017.
- New ICANN domain extensions could increase competition; their effect on VeriSign’s business was uncertain. The company also cited dependence on registrar marketing, evolving Internet navigation behavior, economic conditions, and technology and pricing competition.
- In 2010, attackers accessed part of the corporate network and exfiltrated information from some compromised systems. Management said it found no evidence that the DNS network or zone files were breached, but could not assure that exfiltrated information would not be used. The incidents were not adequately escalated to management when they occurred; management learned of them in September 2011 and said it strengthened reporting and escalation processes. Management and the auditor nevertheless concluded disclosure controls and internal control over financial reporting were effective at year-end.
- CEO and CFO departures occurred in 2011; Executive Chairman D. James Bidzos became CEO and John Calys was Interim CFO. The filing noted potential transition and recruiting risks.
- Foreign subsidiaries held $1.1 billion of cash and cash equivalents; $532 million of foreign earnings were designated indefinitely reinvested. Repatriation of untaxed foreign funds could create additional U.S. tax. Unrecognized tax benefits were $55.9 million gross, including approximately $45.7 million that could affect the tax provision and effective tax rate.
- Symantec-related indemnities, transition services and retained litigation remain potential obligations. The company accrued a non-material settlement cost for the Herbert litigation; it stated other proceedings were not expected to have a material adverse effect, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Progress and final terms of the .com agreement renewal, and any related DOC approval or pricing provisions.
- Whether domain growth, renewals and the January 2012 price increase support the stated 2012 revenue outlook.
- Cash availability and repatriation constraints, including the amount and tax implications of foreign-held funds.
- Convertible-debenture cash obligations and contingent interest exposure, alongside the $100 million facility borrowing and its covenants.
- Whether security incident remediation and escalation changes are effective, and whether any further information-loss or service-disruption exposure emerges.
- How much FY2011 operating improvement reflects sustainable revenue and expense trends versus completed restructuring and other one-time items; also verify the significant customer concentration disclosed at 30% of continuing revenue.