Business context and reporting period
VeriSign, Inc. operates critical internet infrastructure and provides registry services, principally for .com and .net. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. At quarter-end, the .com and .net domain base was 170.6 million, up 5% year over year.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $329.4 million | $314.4 million | $653.0 million | $626.9 million |
| Operating income | $213.0 million | $206.8 million | $423.4 million | $413.0 million |
| Net income | $147.8 million | $152.5 million | $298.1 million | $486.6 million |
| Diluted EPS | $1.31 | $1.32 | $2.64 | $4.19 |
| Operating margin | 64.7% | 65.8% | 64.8% | 65.9% |
- Q2 revenue grew 5% and operating income 3%; net income fell about 3%. First-half revenue grew 4% and operating income 3%, while net income fell about 39%.
- First-half cash from operations was $340.8 million, down from $395.4 million. Investing used $164.9 million and financing used $360.8 million; cash, cash equivalents and restricted cash decreased $185.2 million.
- At June 30, cash and cash equivalents were $216.5 million and marketable securities $906.5 million. Current assets were $1.189 billion versus current liabilities of $998.3 million. Deferred revenue totaled $1.113 billion, including current and long-term balances.
- Senior notes had a $1.785 billion carrying value. The company had no borrowings under its $200 million revolving credit facility. Stockholders’ deficit was $1.418 billion.
Material changes and unusual items
- Revenue growth was primarily driven by the .com domain base, which increased 6% year over year. New .com/.net registrations in Q2 were 11.7 million versus 11.1 million; the final Q1 2021 renewal rate was 76.0%, compared with 75.4% in Q1 2020.
- China revenue declined 14% in Q2 and 15% in the first half, attributed to lower new registrations and renewal rates. Revenue increased in the other reported regions.
- In June, VeriSign issued $750 million of 2.700% notes due 2031 and redeemed $750 million of 4.625% notes due 2023, using issuance proceeds and cash. Debt extinguishment produced a $2.1 million loss; management expects quarterly interest expense to decrease.
- First-half 2020 net income included a $167.8 million tax benefit from remeasurement of previously unrecognized tax benefits. The related 2010–2014 federal returns remain under IRS examination. This one-time benefit is a major reason first-half 2021 net income was lower year over year.
- The company repurchased 0.8 million shares for $172.5 million in Q2 and 1.7 million shares for $345.1 million in the first half. About $737.5 million remained authorized at quarter-end.
Outlook, risks and contingencies
- Management expects revenue to continue growing during the remainder of 2021, citing domain-base growth and the .com wholesale fee increase from $7.85 to $8.39 effective September 1, 2021. It expects 2021 effective tax rate of 20%–23% and says major expense categories as a percentage of revenue should remain generally consistent. It does not expect non-operating income or loss to be significant for the rest of 2021.
- Management believes available liquidity, operating cash generation and revolving-credit capacity are sufficient for working capital, capital expenditures and debt service for at least 12 months.
- Management said the pandemic had supported domain-name demand to date, but its duration and effects on future growth, operations and financial results remain uncertain. Competition, alternative online-presence services, changing user behavior and economic conditions may constrain domain-base growth.
- Afilias’s .web-related independent review proceeding resulted in a May 2021 decision dismissing claims to invalidate the auction or award .web to Afilias, while recommending that ICANN’s board consider objections and decide on delegation. Afilias sought interpretation/amendment of the decision; VeriSign expected a ruling in Q4 2021. The company said other routine proceedings were not expected to materially affect it.
- No material changes to risk factors since the 2020 Form 10-K were reported. Management concluded disclosure controls were effective; no material internal-control change was reported for the quarter.
Investor facts to verify
- Whether .com domain-base growth, renewal rates and the September 2021 price increase support the revenue outlook, especially given weaker China trends.
- How the 2031 refinancing affects interest expense and debt-service capacity, and how much capital is allocated to future repurchases.
- The comparability of earnings across periods, particularly the 2020 tax benefit and changes in cash taxes and operating cash flow.
- Developments in ICANN’s .web decision process, the pending Afilias application and any resulting business or financial effects.
- The extent to which pandemic-related demand persists and how competition and alternative online services affect registrations and renewals.