VeriSign, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. VeriSign primarily operates the .com and .net domain registries; Security Services revenue is not significant relative to consolidated revenue. Its .com/.net domain-name base was 135.2 million, up 3% year over year.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $265.8 million | $255.0 million | $786.7 million | $754.2 million |
| Operating income | $154.5 million | $139.5 million | $447.7 million | $422.2 million |
| Net income | $92.5 million | $95.2 million | $273.7 million | $289.8 million |
| Diluted EPS | $0.70 | $0.69 | $2.06 | $2.03 |
| Operating margin | 58% | 55% | 57% | 56% |
Q3 revenue increased 4% and operating income rose 11%, while net income declined about 3%. For the first nine months, revenue increased 4%, operating income increased 6%, and net income decreased about 6%. Higher interest expense and tax expense weighed on net income. The 2015 effective tax rate was 24% for both periods, versus 15% for Q3 2014 and 20% for the first nine months of 2014; prior-year rates benefited from discrete tax benefits. Lower weighted-average share counts, principally reflecting repurchases, supported per-share results.
Cash flow and liquidity: Nine-month operating cash flow was $462.9 million, up from $430.5 million. Investing cash flow was negative $510.4 million, primarily reflecting net purchases of marketable securities; financing cash flow was positive $33.8 million. Cash and cash equivalents were $177.9 million and marketable securities were $1.713 billion at quarter-end, totaling $1.891 billion. Most marketable securities were U.S. Treasury securities due within one year. About $1.1 billion of cash, cash equivalents and marketable securities was held by foreign subsidiaries and intended to remain invested abroad.
Debt and capital: The company issued $500 million of 5.25% senior notes due 2025 in March and reported $750 million principal outstanding on 4.625% notes due 2023. It also had $1.25 billion principal amount of 3.25% subordinated convertible debentures due 2037. Carrying amounts were $1.235 billion for senior notes and $626.6 million for the convertible debentures; the latter were classified as current. Interest expense rose to $28.5 million in Q3 from $21.5 million, and to $79.1 million for nine months from $64.4 million, mainly reflecting the new 2025 notes. A $200 million unsecured revolver had no borrowings outstanding; the company reported compliance with its covenants. Stockholders’ deficit was $1.031 billion.
The company repurchased 7.5 million shares for $471.8 million during the first nine months; $604.6 million remained authorized at September 30. It reported $492.2 million of net borrowing proceeds in financing activities.
Business changes and management outlook
- Revenue growth was primarily attributed to 3% growth in the .com/.net base and .net fee increases implemented in February 2014 and February 2015. The .net annual fee was scheduled to increase from $6.79 to $7.46 on February 1, 2016; the .com fee remained $7.85 under the current agreement.
- VeriSign added 1.7 million net names in Q3 and processed 9.2 million new .com/.net registrations, compared with 8.7 million a year earlier. The final Q2 2015 renewal rate was 72.7%, versus 71.8% for Q2 2014.
- Management expected continued revenue growth for the remainder of 2015 from domain-base growth and prior .net price increases. It cautioned that Q4 typically has fewer net additions than Q3 and that the recent surge in registrations from emerging and international markets, particularly Asia, was not expected to continue at the same pace.
- Management expected cost of revenue, sales and marketing, research and development, and general and administrative expenses as percentages of revenue to remain broadly consistent with the first nine months. Interest expense as a percentage of revenue was expected to increase because of the 2025 notes. No specific full-year numerical earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- The subordinated convertible debentures were convertible at holders’ option through December 31, 2015 after the stock-price trigger was met. Management intended and believed it could settle principal in cash, but cautioned that conversions exceeding available cash and operating funds could require financing. A $6.4 million contingent-interest payment was scheduled for February 2016.
- Key business risks include reliance on .com/.net registry revenue, competition from new gTLDs and ccTLDs, renewal and registration trends, limits and approvals affecting registry pricing and agreements, and changes in Internet governance. VeriSign also cited cybersecurity and service-continuity threats, regulatory uncertainty—including licensing requirements in China—and risks from the transition of Internet governance functions.
- The company said pending litigation was not expected to materially adversely affect its financial condition, results or cash flows, but outcomes and possible losses could not generally be estimated. The IRS was examining federal returns for 2010–2014. The company also noted possible additional U.S. tax if foreign funds were repatriated.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no significant change in market-risk exposures from year-end 2014.
Important facts for investors to verify
- Whether .com/.net registration growth and renewal rates sustain the trends reported, including the expected seasonal slowdown and competitive effects of new gTLDs.
- How the February 2016 .net fee increase affects demand, renewals and revenue, and the status of .com agreement renewal and pricing constraints.
- The amount and timing of any debenture conversions, cash settlement needs, contingent-interest payments and related financing requirements.
- The availability and potential U.S. tax cost of the approximately $1.1 billion held by foreign subsidiaries.
- Developments in IRS examinations, China licensing, Internet-governance transitions, and material litigation or cybersecurity events.