Business context and reporting period
VeriSign, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. The company operates domain-name registry infrastructure, principally for .com and .net, and also provides network intelligence and availability services. Registry Services generated substantially all revenue; NIA Services revenue was not significant in relation to consolidated revenue.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $965.1 million | $873.6 million |
| Operating income | $528.2 million; 54.7% margin | $457.3 million; 52.4% margin |
| Net income | $544.5 million | $320.0 million |
| Diluted net income per share | $3.49 | $1.95 |
| Cash flow from operations | $579.4 million | $537.6 million |
| Cash, cash equivalents and marketable securities at year-end | $1.723 billion | $1.556 billion |
| Debt principal outstanding | $2.0 billion | $1.25 billion |
Fourth-quarter 2013 revenue was $245.6 million, operating income $130.2 million, and net income $292.1 million (diluted EPS $1.94). The quarter included significant tax and investment items described below. Year-end deferred revenue was $855.8 million, reflecting the company’s ratable recognition of registration fees over service terms.
Material changes versus the prior comparable period
- Revenue rose 10% year over year, principally from growth in .com and .net registrations and prior fee increases. Active .com/.net names increased 5% to 127.2 million, versus 121.1 million at year-end 2012.
- Operating income grew 16%; operating margin increased from 52.4% to 54.7%. Cost of revenues rose 12%, while sales and marketing expense declined 9%; R&D increased 14%.
- Operating cash flow increased 8%. Cash and marketable securities grew despite $1.0 billion of share repurchases.
- VeriSign issued $750 million of 4.625% senior notes due 2023 and used part of the proceeds to repay its $100 million credit-facility borrowing. The $1.25 billion principal amount of 3.25% convertible debentures remained outstanding.
Outlook, management commentary, risks and unusual items
- Management expected 2014 revenue to increase, supported by continued .com/.net domain growth and existing fee increases. It cautioned that economic conditions and registrar marketing changes could constrain registration growth. The filing gives no specific numerical revenue-growth forecast.
- The .net registration fee increased from $5.62 to $6.18 effective February 1, 2014. The .com fee remained $7.85 under the current agreement, subject to limited exceptions and government approval.
- Management expected cost ratios to remain broadly consistent in 2014, interest expense as a percentage of revenue to rise with a full year of senior-note interest, and 2014 capital expenditures of $60–$80 million, primarily for infrastructure and product improvements.
- Fourth-quarter results included a $375.3 million income-tax benefit from a planned worthless-stock deduction, net of valuation allowances and uncertain-tax-position accruals; a $167.1 million tax expense related to an intended foreign-cash repatriation; and a $15.8 million pretax gain on sale of cost-method investments. The company warned the IRS could challenge the deduction. The net full-year income-tax benefit was $87.7 million.
- VeriSign intended to repatriate approximately $700–$800 million from foreign subsidiaries in the second or third quarter of 2014, using the tax benefit to offset U.S. tax on the repatriation. About $1.5 billion of cash and marketable securities was held by foreign subsidiaries at year-end, so not all reported liquidity was immediately available domestically without potential tax consequences.
- Major risks include dependence on .com/.net and the associated ICANN and Department of Commerce agreements and pricing limits; competition and operational uncertainty from new gTLDs; cyberattacks, DDoS events or service interruptions; and tax uncertainty. The convertible debentures became convertible at holders’ option in Q1 2014 after the share-price trigger was met; settlement could require cash or cause dilution. The filing reported no material off-balance-sheet arrangements and stated management did not expect disclosed litigation to materially affect financial condition, results or cash flows.
Important facts for investors to verify
- Whether the IRS sustains the worthless-stock deduction and whether the planned $700–$800 million repatriation proceeds as intended.
- Subsequent .com/.net registration growth, renewal trends, and the effect of new gTLDs and registrar marketing on the core domain base.
- Cash available in the United States after repatriation, share repurchases and debt service; verify the treatment and conversion or settlement of the convertible debentures.
- Whether the stated 2014 revenue outlook, expense expectations and $60–$80 million capital-expenditure plan remain applicable.
- Performance and resilience of registry infrastructure amid cyber threats, new-TLD delegation and any changes to key registry agreements.