VeriSign, Inc. — Q2 2009 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2009; filed August 6, 2009. VeriSign’s core Internet Infrastructure and Identity Services segment comprises domain-name registry and authentication services. The company continued its strategy of selling or winding down non-core businesses. Comparative figures were reclassified to reflect iDefense as a continuing operation.
Key financial results
Amounts are in millions of dollars except per-share data; comparisons are with the corresponding 2008 period.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $256.6 | $242.0 | $511.6 | $477.3 |
| Operating income (loss) | $84.1 | $(17.0) | $158.9 | $11.5 |
| Continuing-operations income (loss), net of tax | $44.3 | $(13.0) | $91.2 | $3.5 |
| Net income (loss) attributable to VeriSign common stockholders | $34.9 | $(69.2) | $99.9 | $(77.2) |
| Diluted EPS | $0.18 | $(0.35) | $0.52 | $(0.37) |
- Revenue grew 6% in Q2 and 7% year to date. Naming Services revenue rose 15% in Q2 and 16% year to date; Authentication Services rose 1% and 4%, respectively.
- Approximate gross margin, calculated as revenue less cost of revenue, was 77.6% in Q2 versus 77.0%; for six months it was 77.0% versus 75.8%. Operating margin was approximately 32.8% in Q2 and 31.0% year to date.
- Six-month operating cash flow was $121.3 million, down from $247.0 million. Investing cash flow was $309.1 million, including $235.5 million of net divestiture proceeds. Financing cash flow was $92.7 million, versus $1,056.6 million used in the prior-year period, which included substantial share repurchases.
- Cash and cash equivalents were $1.308 billion at June 30, up from $789.1 million at year-end 2008. The company reported $1.25 billion principal amount of 3.25% convertible debentures due 2037; their balance-sheet carrying amount, including the contingent-interest derivative, was $570.7 million. The $500 million credit facility had no borrowings; $4.1 million was used for letters of credit.
- Working-capital-related indicators include current assets of $1.817 billion and current liabilities of $956.4 million. Deferred revenue totaled $877.9 million, including long-term deferred revenue.
Material changes and unusual items
- Operating results improved substantially, reflecting revenue growth, cost-saving initiatives and much lower restructuring and other charges. Q2 2008 included $79.1 million of charges related to the sale of Mountain View facilities; six-month 2008 continuing-operations restructuring and other charges were $101.4 million, compared with $5.2 million in 2009.
- Revenue from discontinued operations fell to $69.8 million in Q2 from $148.9 million and to $172.4 million for six months from $307.1 million, reflecting divestitures and the non-core wind-down. Discontinued operations produced a net loss of $8.5 million in Q2, but net income of $10.1 million for the first half.
- During the first half, VeriSign sold Communications Services for $226.2 million cash consideration, Real-Time Publisher Services and International Clearing. Reported disposal results included a $57.3 million after-tax loss on Communications Services and gains on the other sales. It sold Managed Security Services for $42.9 million net consideration on July 6, after quarter-end.
- Cash flow benefited from divestiture receipts and distributions from The Reserve funds. At quarter-end, $32.4 million remained in those funds and was classified in prepaid expenses and other current assets due to the lack of an active market.
- VeriSign adopted accounting guidance requiring separate presentation of debt and equity components for its convertible debentures, with retrospective adjustment. This increased reported non-cash interest expense; comparative results were also affected by the iDefense reclassification.
Outlook, management commentary and risks
- There is no specific numerical revenue or earnings guidance in the filing. Management expected core revenue to continue growing, but at slower rates in 2009 amid the economic downturn. It expected slower domain-name growth, slower growth in Business Authentication Services and User Authentication Services, and deferred broader adoption of Extended Validation certificates.
- At June 30, VeriSign managed approximately 93.5 million .com and .net names, up 7% year over year, and had approximately 1.172 million SSL certificates, up 11%. Management said growth in SSL certificate volume exceeded revenue growth, partly because sales mix shifted toward lower-priced brands.
- Management expected additional restructuring charges through 2009; the amount and timing were not finalized. It believed cash and operating cash generation would be sufficient for working capital, capital expenditures and debt service for the next 12 months.
- Key risks include economic weakness affecting customer demand and e-commerce; slower registration and renewal growth; competition and price pressure; cyberattacks, security breaches or service outages; dependence on ICANN and renewal of registry agreements; and execution, timing, costs and potential disruption associated with divestitures. Divestitures may also leave VeriSign responsible for contingent liabilities and subject it to non-compete restrictions.
- Contingencies include ongoing shareholder and consumer litigation and a revived antitrust case: the Ninth Circuit reversed and remanded dismissal of the Coalition for ICANN Transparency complaint, and VeriSign sought rehearing. The company said it could not predict outcomes. The NetMoneyIN case was settled in July 2009; VeriSign also disclosed tax uncertainties, including $33.5 million of gross unrecognized tax benefits.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. Subsequent to quarter-end, Mark McLaughlin was appointed CEO effective August 17, and Brian Robins was appointed CFO on August 4.
Important facts for investors to verify
- How much of the earnings improvement reflects recurring core performance versus the prior-year facility-sale and restructuring charges, discontinued-operation gains, tax effects and divestiture accounting.
- The final working-capital adjustment for the Communications Services sale and cash proceeds and accounting effects from other completed or planned divestitures.
- Recovery timing and collectability of the $32.4 million still held in The Reserve funds, and any related valuation changes.
- Progress in core domain-name and authentication businesses, including renewal trends, pricing, customer mix and the effect of economic conditions on growth.
- Future restructuring costs, contingent liabilities retained after sales, and developments in the CFIT, shareholder, consumer and tax matters.
- Convertible-debt cash settlement and liquidity obligations, and the company’s capacity to meet them under adverse operating or market conditions.