VeriSign, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. VeriSign operates critical internet infrastructure and provides registry services, principally for the .com and .net top-level domains.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $317.9 million | $308.4 million | $944.8 million | $921.1 million |
| Operating income | $206.6 million | $205.6 million | $619.7 million | $607.6 million |
| Operating margin | 65.0% | 66.7% | 65.6% | 66.0% |
| Net income | $171.0 million | $153.9 million | $657.6 million | $464.0 million |
| Diluted EPS | $1.49 | $1.30 | $5.68 | $3.89 |
| Operating cash flow | Not separately provided | Not separately provided | $535.0 million | $560.3 million |
- Q3 revenue increased 3% year over year; operating income rose 1%. Revenue growth was primarily driven by .com, partly offset by the absence of the divested security services business.
- Cost of revenue was broadly flat. Nine-month sales and marketing expense fell 27% to $23.9 million, while research and development rose 21% to $55.3 million and general and administrative expense rose 11% to $111.7 million.
- Cash, cash equivalents and marketable securities totaled $1.150 billion at September 30, 2020, versus $1.218 billion at year-end 2019. Total debt carrying value was $1.789 billion; principal outstanding was $1.800 billion. No borrowings were outstanding on the $200 million revolving credit facility.
- Nine-month investing cash outflow was $305.8 million and financing cash outflow was $591.1 million, including $603.7 million of share repurchases. Cash, cash equivalents and restricted cash decreased $362.5 million.
- Total deferred revenue was approximately $1.062 billion, including current and long-term balances, representing remaining performance obligations. Stockholders’ deficit was $1.386 billion.
Material changes and operating indicators
- The .com and .net domain base reached 163.7 million, up 4% year over year and 1.7 million from June 30. Q3 new .com and .net registrations were 10.9 million versus 9.9 million a year earlier.
- The final .com and .net renewal rate for Q2 2020 was 72.8%, compared with 74.2% for Q2 2019.
- Q3 net income benefited from a $24.0 million income tax benefit. Nine-month income tax benefit was $90.2 million, including $191.8 million of benefits from remeasurement of previously unrecognized tax benefits. The 2020 YTD effective tax rate was negative 16%, compared with 19% in 2019.
- Non-operating income declined to $0.8 million in Q3 from $10.5 million, reflecting lower investment interest income and the February 2020 end of transition-services income related to the divested business.
Outlook, risks and unusual items
- Management expected revenue growth for the remainder of 2020 to remain consistent with the nine-month rate, supported by continued growth in the aggregate .com domain base. It expected cost of revenue as a percentage of revenue to remain consistent; sales and marketing as a percentage of revenue to increase; and R&D and G&A percentages to remain consistent.
- Management expected the 2020 annual effective tax rate to be a net benefit of 6%–9%, including the recognized $191.8 million tax benefit. The related federal tax years remained under IRS examination despite written confirmations that no adjustments would be proposed on specified reviewed matters.
- Registry prices for all TLDs, including .com and .net, were frozen through March 31, 2021. VeriSign said it expected to effect a .com price increase by October 25, 2021, subject to the terms of its agreements.
- Management said the pandemic had so far increased domain-name demand as businesses sought an online presence, but its future effects remained uncertain. Fees are generally collected upfront while revenue is recognized over registration terms, so pandemic effects may emerge in later periods.
- Principal risks include pandemic-related demand and operational uncertainty, cyberattacks or infrastructure outages, competition and changes in internet usage, regulatory and ICANN/DOC agreement risks, China-related regulatory risks, tax uncertainty, and substantial debt. Management believed available liquidity, operating cash generation and borrowing capacity were sufficient for at least 12 months.
- The board authorized up to $1.0 billion in share repurchases; $505.6 million remained available at quarter-end. Q3 repurchases totaled $170.0 million for 0.8 million shares.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time tax-benefit remeasurement rather than recurring operations.
- Subsequent .com/.net registration growth and renewal rates, especially given the lower Q2 renewal rate and uncertainty around COVID-19 effects.
- Whether management’s revenue and expense expectations, tax-rate outlook and planned .com pricing timing were achieved.
- Debt-service capacity and the pace of share repurchases relative to operating cash flow and available liquidity.
- Any developments in the IRS examination, ICANN or DOC agreements, cybersecurity, or other contingencies that could affect operations or financial results.