VeriSign, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. This is an annual filing; quarterly data is included, but the filing is not a standalone Q4 report.
Business context
VeriSign provides Internet infrastructure services through one reportable segment, Naming Services: Registry Services and Network Intelligence and Availability (NIA). Registry Services operates the .com and .net registries and other domain registries; NIA includes security intelligence, Managed DNS and DDoS protection. The business is heavily concentrated in Registry Services, while NIA revenue is not significant relative to consolidated revenue.
Key financial metrics
| Metric | FY 2012 | FY 2011 | Change / context |
|---|---|---|---|
| Revenue | $873.6 million | $772.0 million | Up 13% |
| Gross profit / margin | $706.0 million / 80.8% | $606.7 million / 78.6% | Margin calculated from reported figures |
| Operating income / margin | $457.3 million / 52.4% | $329.4 million / 42.7% | Up 39% |
| Continuing-operations income | $312.5 million | $138.6 million | Diluted EPS: $1.91 vs. $0.83 |
| Net income | $320.0 million | $142.9 million | Includes $7.5 million from discontinued operations in 2012 |
| Operating cash flow | $537.6 million | $335.9 million | Up 60% |
| Cash, cash equivalents and marketable securities | $1.556 billion | $1.346 billion | At December 31 |
| Debt | $1.25 billion principal convertible debentures; $100 million revolver borrowing | Same principal amounts | Convertible debentures’ carrying value, including derivative, was $597.6 million |
| Deferred revenue | $812.6 million | $728.6 million | Current and long-term combined |
Reported costs and expenses were 48% of revenue, versus 57% in 2011. Income from continuing operations had a 35.8% net margin in 2012, calculated from reported figures. VeriSign repurchased 7.7 million shares for $314.6 million during 2012; no dividend was paid.
Changes versus the prior comparable period
- Revenue growth reflected a 6% year-over-year increase in active .com and .net names, to 121.1 million, and registration fee increases effective in January 2012.
- Operating income rose faster than revenue, reflecting revenue growth, lower general and administrative costs, and the completion of restructuring. FY 2012 included a $0.8 million restructuring credit, compared with $15.5 million of restructuring charges in 2011.
- Interest expense declined to $50.2 million from $147.3 million, largely because 2011 included $100.0 million of contingent interest tied to a special dividend; 2012 had no such payment.
- Operating cash flow increased, supported by higher customer collections and the absence of the 2011 contingent-interest payment. Investing cash flow was a $1.44 billion use, principally reflecting net purchases of marketable securities.
Outlook, commentary and risks
- Management expected FY 2013 revenue to increase, driven by continued .com and .net domain growth and a .net registry fee increase effective July 1, 2013, from $5.11 to $5.62. The filing gives no specific revenue-growth target.
- Management anticipated 2013 capital expenditures of $60 million to $80 million, primarily for infrastructure and product-portfolio improvements. Cost of revenue as a percentage of revenue was expected to increase slightly; sales and marketing and general and administrative expense ratios were expected to decline slightly, while R&D expense as a percentage of revenue was expected to remain consistent.
- The renewed .com agreement runs through November 30, 2018. The standard .com price is capped at $7.85, with limited increases for specified extraordinary costs or policies subject to Department of Commerce approval. The .net agreement permits annual fee increases of up to 10% during its term.
- Growth risks cited include economic weakness in Europe, changes to search and pay-per-click policies that can reduce domain registrations and renewals, and competition from new gTLDs. VeriSign applied to operate 14 new gTLDs and contracted to provide back-end services for approximately 220 applications; management did not expect significant new-gTLD revenue before 2014.
- Other material risks include reliance on the .com and .net registries, regulatory and contractual oversight by ICANN and the Department of Commerce, service interruptions or cyberattacks, customer and channel concentration, and possible dilution or cash demands from convertible debentures. One customer represented approximately 30% of continuing-operations revenue in 2012.
- The filing disclosed a derivative lawsuit concerning incentive compensation plans and a securities class action filed in January 2013 alleging misleading statements about the .com renewal and revenue guidance. Management said it could not predict litigation outcomes or reasonably estimate possible losses for certain matters, but did not believe the proceedings then under review would materially adversely affect financial condition or results.
Unusual items and matters to note
- Fourth-quarter 2012 net income included disclosed pre-tax benefits of $13.6 million, primarily reimbursements of litigation and defense costs; $5.5 million from a lower estimated bonus payout; and a $7.6 million unrealized gain from a lower fair value of the convertible-debenture embedded derivative.
- FY 2012 discontinued-operations income of $7.5 million primarily reflected reimbursements and reversals of retained liabilities related to divested businesses.
- At year-end, $1.3 billion of cash and marketable securities was held by foreign subsidiaries and intended to be indefinitely reinvested abroad. Repatriation could result in additional U.S. taxes.
- Management and KPMG reported effective internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether .com and .net registration growth and renewal rates support the revenue outlook, particularly given the disclosed search-policy and European-economy pressures.
- The precise terms and constraints of the renewed .com agreement, including the price cap, exceptions and Department of Commerce approval requirements.
- How much of 2012 earnings growth reflects recurring operating performance versus lower restructuring and interest costs and the fourth-quarter benefits described above.
- The location, accessibility and tax implications of foreign-held liquidity, and the cash-flow implications of the convertible debentures and revolving credit facility.
- Developments in the disclosed lawsuits, retained divestiture liabilities, and the competitive and operational effects of new gTLD launches.