VeriSign, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. VeriSign operates critical internet infrastructure and provides registry services, principally for the .com and .net top-level domains. At quarter-end, its .com and .net domain name base was 157.4 million.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $308.4 million | $305.8 million | $921.1 million | $907.5 million |
| Operating income | $205.6 million | $195.0 million | $607.6 million | $573.4 million |
| Operating margin | 66.7% | 63.8% | 66.0% | 63.2% |
| Net income | $153.9 million | $137.7 million | $464.0 million | $400.3 million |
| Net margin | 49.9% | 45.0% | 50.4% | 44.1% |
| Diluted EPS | $1.30 | $1.13 | $3.89 | $3.25 |
- Q3 and nine-month revenue each rose about 1% year over year. Domain-base growth and the February 2018 .net fee increase were partly offset by a smaller Security Services business as customer contracts transitioned to Neustar.
- Q3 operating income increased 5%; nine-month operating income increased 6%. Lower cost of revenues and sales and marketing expenses improved operating margins.
- For the nine months, operating cash flow was $560.3 million, versus $479.3 million in 2018. Investing activities used $237.8 million; financing activities used $570.3 million, including $583.5 million of common-stock repurchases. Cash, cash equivalents and restricted cash declined $248.1 million to $118.7 million.
- At September 30, cash and cash equivalents were $109.3 million and marketable securities were $1.12 billion, for $1.23 billion combined. Securities were primarily U.S. Treasury debt, all scheduled to mature in less than one year.
- Senior notes had $1.8 billion principal outstanding: $750 million due 2023, $500 million due 2025 and $550 million due 2027. No borrowings were outstanding under the $200 million revolving credit facility. The balance sheet reported $1.787 billion of senior notes.
- During Q3, VeriSign repurchased 1.0 million shares for $194.0 million. Approximately $522.1 million remained authorized for repurchases. Stockholders’ deficit was $1.45 billion.
Material changes and unusual items
- The domain name base increased 4% year over year; .com registrations grew 5% and .net declined 5%. The final .com and .net renewal rate for Q2 2019 was 74.2%, compared with 75.0% for Q2 2018.
- Security Services customer-contract transitions to Neustar reduced related revenues and expenses. VeriSign recognized $11.9 million of transition-services income in the first nine months of 2019.
- Nine-month interest expense fell to $67.9 million from $92.2 million, principally because the subordinated convertible debentures were settled in May 2018.
- The nine-month 2019 effective tax rate was 19%; income tax expense included a $14.6 million benefit from excess tax benefits related to stock-based compensation. VeriSign completed repatriation of $249.0 million of foreign-held cash, net of previously accrued withholding taxes.
- Adoption of lease accounting in 2019 resulted in a $10.4 million operating-lease right-of-use asset at quarter-end and was not material to the financial statements.
Outlook, risks and contingencies
- Management expected revenue growth for the remainder of 2019 to remain consistent with the nine-month pace: continued .com growth offset by further Security Services revenue declines during the Neustar transition.
- Management expected cost of revenues, sales and marketing, and general and administrative expenses as a percentage of revenue to increase slightly for the remainder of 2019; cited factors included infrastructure projects, additional marketing campaigns, and infrastructure and security spending. Research and development and interest expense as a percentage of revenue were expected to remain consistent.
- Management said available cash, securities, operating cash generation and borrowing capacity should cover working capital, capital expenditures and debt service for at least the next 12 months.
- Key risks include dependence on .com and .net agreements and ICANN/DOC policies, pricing and renewal terms; competition and changing internet-user behavior; cybersecurity, DDoS attacks and service interruptions; evolving privacy and international regulation; and significant debt.
- Afilias’s ICANN arbitration challenges the .web agreement involving VeriSign and Nu Dotco. A ruling on VeriSign’s and NDC’s participation was expected in Q4 2019. VeriSign said it considered the claims without merit and intended to oppose them; the filing does not quantify a potential loss.
Investor verification points
- Track registration growth and renewal rates, especially the divergence between .com and .net and the effect on revenue.
- Monitor the Neustar transition, remaining Security Services revenue and transition-services income.
- Review developments in the .com and .net agreements, permitted pricing changes, and the .web arbitration.
- Assess the pace and funding of share repurchases against debt obligations and liquidity needs.
- Follow infrastructure and security costs and whether management’s remainder-of-2019 expectations are met.